Monday, November 30, 2009
U.S. Economy: Existing Home Sales Jump as Prices Fall
Nov. 23 (Bloomberg) -- Sales of existing U.S. homes jumped 10 percent in October to the highest level since February 2007 as Americans rushed to take advantage of a tax credit, cheaper properties and lower mortgage rates.
Purchases rose more than forecast to a 6.1 million annual rate from a 5.54 million pace in September, the National Association of Realtors said today in Washington. The median sales price decreased 7.1 percent from October 2008.
Stocks extended gains on signs the industry at the center of the deepest recession since the 1930s may contribute to a recovery. The extension of a tax credit originally due to expire Nov. 30 and its expansion beyond first-time buyers may fuel further gains in home sales, helping to overcome the drag from rising foreclosures and unemployment.
“It’s an impressive increase and shows a lot of pent-up demand for housing,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “Buyers have enough confidence to take the plunge. The housing market recovery will be a durable one.”
The Standard & Poor’s 500 Index rose 1.4 percent to 1,106.24 at 4:07 p.m. in New York. The Dow Jones Industrial Average climbed to a 13-month high, adding 1.3 percent to close at 10,450.95.
Existing home sales were forecast to rise to a 5.7 million annual rate, according to the median estimate of 66 economists in a Bloomberg News survey. Estimates ranged from 5.2 million to 6 million, after an initially reported 5.57 million rate in September.
Condos, Co-ops
Sales of existing single-family homes rose 9.7 percent, the biggest gain since 1983, to an annual rate of 5.33 million. Sales of condos and co-ops increased 13.2 percent to a 770,000 rate.
The share of homes sold as foreclosures or otherwise distressed properties rose to 30 percent from 29 percent in September, NAR chief economist Lawrence Yun said in a press conference today.
A “similarly robust” sales gain may occur this month, he said. “With such a sales spike, a measurable decline should be anticipated in December and early next year before another surge in spring and early summer,” Yun said.
The number of previously owned unsold homes on the market fell 3.7 percent to 3.57 million. At the current sales pace, it would take 7 months to sell those houses, compared with 8 months at the end of the prior month. The months’ supply is the lowest since February 2007.
New-Home Sales
Sales of previously owned homes, which make up more than 90 percent of the market, are compiled from contract closings and may reflect purchases agreed upon weeks or months earlier. Many economists consider new-home sales, recorded when a contract is signed, a more timely barometer.
The Commerce Department may report on Nov. 25 that new home sales rebounded to a 405,000 annual rate in October, according to the Bloomberg survey.
Home construction seized up last month as builders waited to find out if the first-time homebuyer tax credit would end, a Commerce Department report showed last week. Builders in October broke ground on the fewest houses since April’s record low annual pace.
Sales and construction may get another boost after President Barack Obama on Nov. 6 extended the incentive until April 30. Earlier, buyers had to close the transaction by Nov. 30 to be eligible. The government also expanded the program to include some current owners.
Debt Purchases
Mortgage rates held down by Federal Reserve purchases of housing debt are also spurring a recovery in the housing market. The average rate on a 30-year fixed mortgage fell last week to 4.83 percent, the lowest since May, according to Freddie Mac.
Borrowing costs may remain low as the Fed has signaled it will keep the benchmark interest rate near zero for an “extended period.”
“Activity in the housing sector has increased over recent months,” Fed policy makers said in their Nov. 4 statement. “Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”
The labor market remains a risk for housing. The unemployment rate, which rose to a 26-year high of 10.2 percent last month, will stay above 10 percent through the first half of 2010, a Bloomberg survey showed.
Foreclosure Filings
Foreclosure filings surpassed 300,000 for an eighth straight month in October as rising joblessness made it tougher for homeowners to pay bills, according to RealtyTrac Inc. data.
Some companies see a potential for stronger demand. Hovnanian Enterprises Inc., New Jersey’s largest homebuilder, has signed contracts or options to buy 4,000 land lots in preparation for a market recovery, said Chief Executive Officer Ara K. Hovnanian. The Red Bank, New Jersey-based builder had reduced its land holdings during the recession.
“Prices are ridiculously low in some markets,” he said at a conference in New York on Nov. 17. “That’s not going to stay.”
Sales of existing homes were led by a 14.4 percent jump in the Midwest, today’s report showed. Purchases rose 12.7 percent in the South, 11.6 percent in the Northeast and 1.6 percent in the West.
Sales had reached a 4.49 million pace in January, their lowest level since comparable records began in 1999.
Purchases of existing homes rose 23.5 percent in October compared with a year earlier. The median price fell 7.1 percent from a year earlier, to $173,100.
U.S. Bank Examiners Faulted for Oversight at Failed Lenders
Nov. 27 (Bloomberg) -- Treasury Department and Federal Reserve examiners should have done more to halt risky lending at U.S. banks that failed amid real-estate losses, reports by agency watchdogs show.
Ten of the 12 bank-collapse reviews released by the Fed and Treasury inspectors general this year fault oversight weaknesses including failure to limit excessive concentration in commercial real-estate loans. Examiners from the Fed, and Treasury’s Office of the Comptroller of the Currency and Office of Thrift Supervision also failed to issue enforcement orders and hold banks accountable for recommended changes, according to reports posted to agency Web sites.
“We found that regulators conducted regular and timely examinations and identified operational problems, but were slow to take enforcement action to correct the problems,” according to a statement from the Treasury’s Office of Inspector General.
Regulators have closed 124 banks this year, the most since 1992, amid loan losses stemming from the worst financial crisis since the Great Depression. The failures have pushed the Federal Deposit Insurance Corp.’s insurance fund, used to pay customers for deposits of up to $250,000 when a bank fails, into an $8.2 billion deficit as of Sept. 30.
Inspectors general at the Fed and Treasury are required to release autopsies for some failed banks to explain collapses and assess the effectiveness of oversight. The Treasury inspector general released five reports for the OTS and four for the OCC this year. The Fed’s watchdog released three reports this year. The FDIC’s inspector general released 26 reports in the same period, citing similar concerns.
‘Opportunity to Improve’
“We agree with the IG that in several cases we should have acted more quickly, and we have taken steps to ensure more appropriate responses,” OCC spokesman Robert Garsson said. “The OTS views the results of each material loss review as an opportunity to improve our supervision and regulation of savings associations and their holding companies,” said William Ruberry, a spokesman for the thrift regulator.
Fed spokeswoman Barbara Hagenbaugh referred to central bank Chairman Ben Bernanke’s Oct. 23 speech.
“We are taking steps to strengthen oversight and enforcement, particularly at the firm-wide level, and we are augmenting our traditional microprudential, or firm-specific, methods of oversight with a more macroprudential, or systemwide, approach that should help us better anticipate and mitigate broader threats to financial stability,” Bernanke said.
Ten of the 12 bank-collapse reviews released by the Fed and Treasury inspectors general this year fault oversight weaknesses including failure to limit excessive concentration in commercial real-estate loans. Examiners from the Fed, and Treasury’s Office of the Comptroller of the Currency and Office of Thrift Supervision also failed to issue enforcement orders and hold banks accountable for recommended changes, according to reports posted to agency Web sites.
“We found that regulators conducted regular and timely examinations and identified operational problems, but were slow to take enforcement action to correct the problems,” according to a statement from the Treasury’s Office of Inspector General.
Regulators have closed 124 banks this year, the most since 1992, amid loan losses stemming from the worst financial crisis since the Great Depression. The failures have pushed the Federal Deposit Insurance Corp.’s insurance fund, used to pay customers for deposits of up to $250,000 when a bank fails, into an $8.2 billion deficit as of Sept. 30.
Inspectors general at the Fed and Treasury are required to release autopsies for some failed banks to explain collapses and assess the effectiveness of oversight. The Treasury inspector general released five reports for the OTS and four for the OCC this year. The Fed’s watchdog released three reports this year. The FDIC’s inspector general released 26 reports in the same period, citing similar concerns.
‘Opportunity to Improve’
“We agree with the IG that in several cases we should have acted more quickly, and we have taken steps to ensure more appropriate responses,” OCC spokesman Robert Garsson said. “The OTS views the results of each material loss review as an opportunity to improve our supervision and regulation of savings associations and their holding companies,” said William Ruberry, a spokesman for the thrift regulator.
Fed spokeswoman Barbara Hagenbaugh referred to central bank Chairman Ben Bernanke’s Oct. 23 speech.
“We are taking steps to strengthen oversight and enforcement, particularly at the firm-wide level, and we are augmenting our traditional microprudential, or firm-specific, methods of oversight with a more macroprudential, or systemwide, approach that should help us better anticipate and mitigate broader threats to financial stability,” Bernanke said.
U.S. Stocks, Commodities Decline as Bonds Gain on Dubai Crisis
Nov. 27 (Bloomberg) -- U.S. and emerging-market stocks slumped and commodities dropped as Dubai’s attempt to delay debt repayments unnerved investors. Treasuries and the dollar rose while credit-default swaps surged.
The Standard & Poor’s 500 Index slid 1.7 percent at 1 p.m. in New York and the MSCI Emerging Markets Index slipped 1.9 percent. The Chicago Board Options Exchange Volatility Index, the equity-derivatives benchmark known as the VIX, surged 21 percent. Two-year Treasury yields fell to the lowest level since December. Oil and copper tumbled and gold fell for the first time in 10 days as the Dollar Index advanced. Credit-default swaps tied to debt sold by Dubai rose 105 basis points to 646, according to CMA DataVision.
“The world’s going to test now how much this means to people’s risk-taking attitude,” said Donald Ross, the Cleveland-based global strategist for Titanium Asset Management Corp., which manages $9 billion. “This is a big enough deal for people to question how far and how fast we’ve come.”
Dubai World, the government investment company burdened by $59 billion of liabilities, sought this week to delay repayment on much of its debt. The yen pared its advance after Japan’s Finance Minister Hirohisa Fujii said he may contact the U.S. and Europe to act on currencies, signaling concern that the yen’s ascent will hurt the economy by crimping exports.
U.S. stock exchanges closed at 1 p.m. in New York, three hours early.
Asia, Europe Stocks
The MSCI Asia Pacific Index slid 3.1 percent, the biggest drop since August, extending a rout in Europe yesterday that sent the Dow Jones Stoxx 600 Index to its steepest one-day slump since April. The MSCI World Index fell 1 percent, bringing its two-day drop to 2.3 percent. The Dow Jones Industrial Average slid 1.5 percent, after U.S. markets were closed yesterday for Thanksgiving.
South Korea’s Kospi index slid 4.7 percent and Taiwan’s Taiex lost 3.2 percent. Samsung Engineering Co. tumbled 9.8 percent, leading declines among construction stocks in Seoul on concern orders may slow in the United Arab Emirates, the biggest overseas market for South Korean builders.
Dubai’s attempt to delay debt payments prompted investors to buy assets deemed safe and sell riskier ones. Treasury two- year notes rallied, driving their yields down 0.06 percentage point to 0.68 percent, the lowest in 11 months. The VIX, which tends to rise when investors are less willing to take risks, jumped as much as 27 percent in the biggest intraday gain since Oct. 30.
‘Risk Aversion’
“We’re bound to see a rise in risk aversion,” Arnab Das, the head of market research and strategy at Roubini Global Economics, said in an interview from London. “The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance sheet stresses.”
The MSCI World has rallied 66 percent since March 9, and the S&P 500 has climbed 61 percent in the steepest rally since the Great Depression. The rebound came as the Federal Reserve spent, lent or guaranteed $11.6 trillion and held interest rates near zero to unlock credit markets and end the first simultaneous recessions in the U.S., Europe and Japan since World War II.
Europe’s Stoxx 600 reversed a decline of as much as 1.8 percent and gained 1.2 percent, giving it a two-day decline of 2.2 percent. Royal Bank of Scotland Group Plc, which JPMorgan Chase & Co. says was Dubai World’s biggest loan arranger since January 2007, gained 5.2 percent in London after plunging 7.8 percent yesterday.
Oil, Gold Drop
Oil fell 2.6 percent to $75.91 a barrel in New York. Copper lost 2.4 percent to $3.1205 a pound. Gold retreated 1.3 percent to $1,173.80 an ounce. The Dollar Index rose 0.2 percent to 75.
Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the worst global recession since World War II. Home prices fell 50 percent from their 2008 peak, according to Deutsche Bank AG.
“If Dubai has to default, that could start a wave of defaults in other areas,” Mark Mobius, the chairman of Templeton Asset Management Ltd. who oversees $25 billion in emerging-market assets, said in an interview on Bloomberg Television from Hanoi. “This may be the trigger to allow for the market to take a rest and pull back.”
Debt Swaps
Credit-default swaps on emerging-market government and corporate bonds jumped, with contracts on Qatar adding 6 basis points to 120 and Abu Dhabi rising 19 to 178, according to CMA DataVision prices. Default swaps on DP World Ltd., the Middle East’s biggest port operator, rose 132 basis points to 740, according to CMA. Swaps on Malaysian government bonds rose 11 basis points to 115 and those on Thailand climbed 6 to 116.
Default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
The cost to protect U.S. corporate bonds from default rose to the highest in almost a month as Dubai attempts to delay debt repayments, trading in a benchmark credit derivatives index shows.
U.S. Swaps
Contracts on the Markit CDX North America Investment-Grade Index, used to speculate on the creditworthiness of 125 companies in the U.S. and Canada or to protect against losses on their debt, rose five basis points to a midprice of about 107.5 basis points as of 10:22 a.m. in New York, according to Phoenix Partners Group. The index rose to the highest since Nov. 2, according to CMA DataVision.
Dubai’s debt woes may worsen to become a “major sovereign default” that roils developing nations and cuts off capital flows to emerging markets, Bank of America Corp. said.
“One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,” Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.
Writedowns and losses at banks around the world have risen to more than $1.7 trillion since 2007 as the credit crisis undermined the value of assets owned by financial institutions, according to data compiled by Bloomberg.
Dollar Gains
The dollar rose against most major counterparts as Dubai’s attempt to delay debt spurred investors to sell higher-yielding assets funded with the currency.
The yen declined against the dollar after touching a 14- year high on speculation Japan will intervene after Finance Minister Hirohisa Fujii said he will contact U.S. and European officials about exchange rates if needed. The Bank of Japan checked rates at commercial banks in Tokyo, seen as a type of verbal intervention, Kyodo News Service reported. The dollar’s gain was reduced as global equity markets pared losses.
“People are scared and concerned about possible intervention,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. The Bank of Japan may sell the yen “and buy Treasuries, which will be a plus for Treasuries,” he said. Central banks intervene by buying or selling their currencies after sudden movements.
The Standard & Poor’s 500 Index slid 1.7 percent at 1 p.m. in New York and the MSCI Emerging Markets Index slipped 1.9 percent. The Chicago Board Options Exchange Volatility Index, the equity-derivatives benchmark known as the VIX, surged 21 percent. Two-year Treasury yields fell to the lowest level since December. Oil and copper tumbled and gold fell for the first time in 10 days as the Dollar Index advanced. Credit-default swaps tied to debt sold by Dubai rose 105 basis points to 646, according to CMA DataVision.
“The world’s going to test now how much this means to people’s risk-taking attitude,” said Donald Ross, the Cleveland-based global strategist for Titanium Asset Management Corp., which manages $9 billion. “This is a big enough deal for people to question how far and how fast we’ve come.”
Dubai World, the government investment company burdened by $59 billion of liabilities, sought this week to delay repayment on much of its debt. The yen pared its advance after Japan’s Finance Minister Hirohisa Fujii said he may contact the U.S. and Europe to act on currencies, signaling concern that the yen’s ascent will hurt the economy by crimping exports.
U.S. stock exchanges closed at 1 p.m. in New York, three hours early.
Asia, Europe Stocks
The MSCI Asia Pacific Index slid 3.1 percent, the biggest drop since August, extending a rout in Europe yesterday that sent the Dow Jones Stoxx 600 Index to its steepest one-day slump since April. The MSCI World Index fell 1 percent, bringing its two-day drop to 2.3 percent. The Dow Jones Industrial Average slid 1.5 percent, after U.S. markets were closed yesterday for Thanksgiving.
South Korea’s Kospi index slid 4.7 percent and Taiwan’s Taiex lost 3.2 percent. Samsung Engineering Co. tumbled 9.8 percent, leading declines among construction stocks in Seoul on concern orders may slow in the United Arab Emirates, the biggest overseas market for South Korean builders.
Dubai’s attempt to delay debt payments prompted investors to buy assets deemed safe and sell riskier ones. Treasury two- year notes rallied, driving their yields down 0.06 percentage point to 0.68 percent, the lowest in 11 months. The VIX, which tends to rise when investors are less willing to take risks, jumped as much as 27 percent in the biggest intraday gain since Oct. 30.
‘Risk Aversion’
“We’re bound to see a rise in risk aversion,” Arnab Das, the head of market research and strategy at Roubini Global Economics, said in an interview from London. “The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance sheet stresses.”
The MSCI World has rallied 66 percent since March 9, and the S&P 500 has climbed 61 percent in the steepest rally since the Great Depression. The rebound came as the Federal Reserve spent, lent or guaranteed $11.6 trillion and held interest rates near zero to unlock credit markets and end the first simultaneous recessions in the U.S., Europe and Japan since World War II.
Europe’s Stoxx 600 reversed a decline of as much as 1.8 percent and gained 1.2 percent, giving it a two-day decline of 2.2 percent. Royal Bank of Scotland Group Plc, which JPMorgan Chase & Co. says was Dubai World’s biggest loan arranger since January 2007, gained 5.2 percent in London after plunging 7.8 percent yesterday.
Oil, Gold Drop
Oil fell 2.6 percent to $75.91 a barrel in New York. Copper lost 2.4 percent to $3.1205 a pound. Gold retreated 1.3 percent to $1,173.80 an ounce. The Dollar Index rose 0.2 percent to 75.
Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the worst global recession since World War II. Home prices fell 50 percent from their 2008 peak, according to Deutsche Bank AG.
“If Dubai has to default, that could start a wave of defaults in other areas,” Mark Mobius, the chairman of Templeton Asset Management Ltd. who oversees $25 billion in emerging-market assets, said in an interview on Bloomberg Television from Hanoi. “This may be the trigger to allow for the market to take a rest and pull back.”
Debt Swaps
Credit-default swaps on emerging-market government and corporate bonds jumped, with contracts on Qatar adding 6 basis points to 120 and Abu Dhabi rising 19 to 178, according to CMA DataVision prices. Default swaps on DP World Ltd., the Middle East’s biggest port operator, rose 132 basis points to 740, according to CMA. Swaps on Malaysian government bonds rose 11 basis points to 115 and those on Thailand climbed 6 to 116.
Default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
The cost to protect U.S. corporate bonds from default rose to the highest in almost a month as Dubai attempts to delay debt repayments, trading in a benchmark credit derivatives index shows.
U.S. Swaps
Contracts on the Markit CDX North America Investment-Grade Index, used to speculate on the creditworthiness of 125 companies in the U.S. and Canada or to protect against losses on their debt, rose five basis points to a midprice of about 107.5 basis points as of 10:22 a.m. in New York, according to Phoenix Partners Group. The index rose to the highest since Nov. 2, according to CMA DataVision.
Dubai’s debt woes may worsen to become a “major sovereign default” that roils developing nations and cuts off capital flows to emerging markets, Bank of America Corp. said.
“One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,” Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.
Writedowns and losses at banks around the world have risen to more than $1.7 trillion since 2007 as the credit crisis undermined the value of assets owned by financial institutions, according to data compiled by Bloomberg.
Dollar Gains
The dollar rose against most major counterparts as Dubai’s attempt to delay debt spurred investors to sell higher-yielding assets funded with the currency.
The yen declined against the dollar after touching a 14- year high on speculation Japan will intervene after Finance Minister Hirohisa Fujii said he will contact U.S. and European officials about exchange rates if needed. The Bank of Japan checked rates at commercial banks in Tokyo, seen as a type of verbal intervention, Kyodo News Service reported. The dollar’s gain was reduced as global equity markets pared losses.
“People are scared and concerned about possible intervention,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. The Bank of Japan may sell the yen “and buy Treasuries, which will be a plus for Treasuries,” he said. Central banks intervene by buying or selling their currencies after sudden movements.
Shoppers Seek ‘Elusive Game’ at U.S. Best Buy, Target
Nov. 27 (Bloomberg) -- Shoppers took advantage of Black Friday discounts to snap up televisions, laptop computers and robot hamsters at Best Buy Co., Target Corp. and Toys “R” Us Inc. stores from New Jersey to Texas.
Wal-Mart Stores Inc., the world’s largest retailer, drew crowds with $298 Hewlett-Packard laptop computers and other doorbuster specials that went on sale at 5 a.m. Best Buy Inc., the biggest electronics chain, had bigger early-morning crowds than last year, Chief Executive Officer Brian Dunn said. The lines in front of the stores were longer, and the company’s Web site attracted more visitors, Dunn said.
“Those are both directionally important indicators for us,” Dunn said in a Bloomberg Television interview.
The day after U.S. Thanksgiving is known as Black Friday, the traditional beginning of holiday buying. Explanations of the phrase’s origins differ, one holding that it’s the weekend when retailers go to being in the black, profitable for the year. Stores open early on Black Friday and offer early-bird discounts to attract business. This year, shoppers say they plan to spend less on gifts than they did last year.
“I do this because of my family,” Eihab Elzubier, a truck driver, said as he stood at the head of the line outside a Best Buy in Greensboro, North Carolina, before the store opened this morning. He arrived at 9 a.m. yesterday and kept his place in line with help of his wife, mother and sister.
$1,000 Savings
Elzubier, 41, figured the 20-hour wait will save him as much as $1,000. He planned to buy a 42-inch Samsung flat-panel TV for $547.99, a Sony laptop computer for $399.99, a Compaq laptop for $179.99, software and accessories.
Walmart, based in Bentonville, Arkansas, kept stores open all night so shoppers could grab $3 pajamas and $15 Miley Cyrus jeans when they went on sale at 5 a.m. Employees handed out vouchers for discounted consumer electronics to early arrivals and distributed circulars and maps indicating promoted items.
The world’s largest retailer cut some toy prices to $5. Walmart, Plano, Texas-based J.C. Penney Co., Target, Macy’s Inc. and Sears Holdings Corp.’s Kmart all advertised discounted slow cookers for early shoppers in Thursday circulars. Prices ranged from $3 to $20.
Shirley Johnson, 48, an accounting clerk from Rittman, Ohio, was hunting for the best values on items like gloves by keeping fliers in her car and going from store to store.
Picking Carefully
“Normally my cart would be full with gifts on Black Friday,” she said at the Walmart in Medina, Ohio. “Now I have maybe $10 worth of carefully picked items that were on special. There are just more and more expenses and less and less money.”
Walmart fell 33 cents to $54.63 at 11:26 a.m. in New York Stock Exchange composite trading. Target fell 18 cents to $47.65. Richfield, Minnesota-based Best Buy lost 33 cents to $42.93, and J.C. Penney declined 52 cents to $30.12.
Toys “R” Us, based in Wayne, New Jersey, had an average 1,000 people outside all its stores before they opened at midnight, five hours earlier than last year, said Chairman and Chief Executive Jerry Storch. The chains sold a “significant number” of Apple Inc. iPods and tens of thousands of Zhu Zhu Pets robot hamsters, he said.
Angela Akra, a 33-year-old office manager from Bristol, Connecticut, got to the Toys “R’ Us store at the Corbin’s Corner shopping center in West Hartford last night at 10:50 p.m. and snared a coveted ticket for a $10 Zhu Zhu Pets toy.
“We’re optimistic,” Storch said in a telephone interview today. “The last thing parents will cut back on is toys for their kids.”
More Traffic
The 12,000-car parking lot at Taubman Centers Inc.’s Woodfield Mall in Chicago was 35 percent full by 6 a.m., compared with 28 percent last year, Bill Taubman, chief operating officer of Taubman Centers, a U.S. real estate investment trust with 24 malls, said in a telephone interview.
“There’s a little more traffic than last year across the board, maybe 10 percent,” he said.
In New York’s Herald Square, shoppers streamed in and out of the Victoria’s Secret and H&M stores with multiple shopping bags at dawn. Crowds gathered in front of Macy’s department store holiday window displays.
Shopper traffic appeared greater than a year ago, and continued to flow into the Herald Square store after the initial rush, Macy’s Chairman and Chief Executive Officer Terry Lundgren said in a telephone interview. Housewares and jewelry were selling “briskly,” he said.
“Last year, we were in a much more defensive posture,” Lundgren said. “This year, we are in a much more offensive posture.”
Coffee Maker
Martha Alfaro, 29, a retail production manager, arrived at the Macy’s store at 5 a.m. and bought a coffee maker.
Members of more than a quarter of U.S. households planned to shop today, according to the International Council of Shopping Centers, a New York-based trade group.
With unemployment at 10.2 percent, price is more important to consumers this year than selection, quality or convenience, according to the National Retail Federation. Shoppers may spend an average of $682.74 on Christmas gifts this year, compared with $705.01 last year, according to the Washington-based NRF.
Apple reduced the price of 21.5-inch iMac computers by $101 to $1,098 today and discounted its 64-gigabyte iPod Touch musical device by $41 to $358, according to the Cupertino, California-based company’s Web site.
Lorna Artibani, 52, hosted a meal at home yesterday for a dozen family members until 10:30 p.m. An hour later, she and her 30-year-old daughter headed to the toy store to look for gifts for her 9-year-old granddaughter.
“It’s kind of like the excitement of getting that elusive game,” said Artibani, a mother of three adults.
Miami May Delay $120 Million Bond on Audit, Possible SEC Probe
Nov. 27 (Bloomberg) -- Miami may delay a $120 million bond sale after an audit showed lax budget practices and the city learned of a possible U.S. Securities and Exchange Commission inquiry, Mayor Tomas Regalado said.
Officials had planned to travel to New York on Dec. 7 to meet with underwriters about the bonds, which were to finance parking garages for the new Florida Marlins baseball stadium, the mayor said in an interview. The $515 million sports complex for the Major League Baseball team is being built with $360 million of public funds.
The internal audit showing the city didn’t comply with its budget standards, and a possible SEC probe, which would have to be disclosed in bond-sale documents, might alter timing of the issue, Regalado said.
“What concerns me about the audit is the appearance of impropriety and whether the SEC will follow up,” Regalado said. “This could affect the sale of the bonds.”
Regalado, 62, took office on Nov. 11 facing declining revenue with property taxes projected to shrink 6.6 percent during the fiscal year ending Sept. 30. He’s seeking to renegotiate a union pension agreement that will cost the city $90.5 million, 18 percent of its 2010 budget. Expense control is necessary for the city to maintain its A+ general-obligation bond rating, the fifth-highest investment grade, and “stable” outlook, Standard & Poor’s said in a July report.
City Manager Pete Hernandez was asked about a possible SEC inquiry two weeks ago, Regalado said in the interview on Nov. 25. Neither he nor Hernandez was aware of a full-fledged investigation, the mayor said.
Attorney Call
Hernandez said he received a telephone call from an attorney representing Charlotte, North Carolina-based Bank of America Corp.’s Merrill Lynch & Co., senior manager of a $65 million issue of Miami street and sidewalk revenue bonds sold earlier this month. The lawyer asked if the city faced any SEC complaints.
“It was a compliance inquiry checking on our practices,” Hernandez said in an interview today. “We called the SEC and they wouldn’t confirm anything.”
Glenn Gordon, assistant regional director of the SEC’s Miami office, wouldn’t elaborate. “I can’t confirm or deny whether there is an investigation,” he said in a telephone interview.
The road and sidewalk bonds maturing in 2039 were priced to yield 5.72 percent on Nov. 19 and sold to a customer for 5.71 percent on Nov. 25, according to Municipal Securities Rulemaking Board data.
The city failed to comply with four of 13 standards governing its budgeting during the fiscal year ended Sept. 30, 2008, Auditor General Victor Igwe said in a Nov. 17 report.
Reserve Requirements
Among shortcomings were reserves $289,510 less than required; some agencies exceeding their budgeted spending and the city using non-recurring revenue such as cost-savings from previous years for pension contributions and other expenses.
Regalado said he would ask officials to explain lapses cited in the audit.
“I don’t think the administration is prepared to make a full disclosure of the finances of the city because we haven’t closed out the fiscal year,” he said.
Miami’s fiscal operations were temporarily taken over by the state in 1996 and its bond rating was cut to high-risk, high-yield e “junk” by S&P when unsound budget practices, including using interagency transfers for recurring expenses, created a $68 million budget deficit. The SEC cited Miami for failing to disclose its true financial condition in documents for three bond sales in 1995, before the city asked for state help.
Miami regained its investment-grade rating in 2001, when S&P raised its grade four levels to BBB+ from BB. It was boosted three more steps to A+ in 2004.
Officials had planned to travel to New York on Dec. 7 to meet with underwriters about the bonds, which were to finance parking garages for the new Florida Marlins baseball stadium, the mayor said in an interview. The $515 million sports complex for the Major League Baseball team is being built with $360 million of public funds.
The internal audit showing the city didn’t comply with its budget standards, and a possible SEC probe, which would have to be disclosed in bond-sale documents, might alter timing of the issue, Regalado said.
“What concerns me about the audit is the appearance of impropriety and whether the SEC will follow up,” Regalado said. “This could affect the sale of the bonds.”
Regalado, 62, took office on Nov. 11 facing declining revenue with property taxes projected to shrink 6.6 percent during the fiscal year ending Sept. 30. He’s seeking to renegotiate a union pension agreement that will cost the city $90.5 million, 18 percent of its 2010 budget. Expense control is necessary for the city to maintain its A+ general-obligation bond rating, the fifth-highest investment grade, and “stable” outlook, Standard & Poor’s said in a July report.
City Manager Pete Hernandez was asked about a possible SEC inquiry two weeks ago, Regalado said in the interview on Nov. 25. Neither he nor Hernandez was aware of a full-fledged investigation, the mayor said.
Attorney Call
Hernandez said he received a telephone call from an attorney representing Charlotte, North Carolina-based Bank of America Corp.’s Merrill Lynch & Co., senior manager of a $65 million issue of Miami street and sidewalk revenue bonds sold earlier this month. The lawyer asked if the city faced any SEC complaints.
“It was a compliance inquiry checking on our practices,” Hernandez said in an interview today. “We called the SEC and they wouldn’t confirm anything.”
Glenn Gordon, assistant regional director of the SEC’s Miami office, wouldn’t elaborate. “I can’t confirm or deny whether there is an investigation,” he said in a telephone interview.
The road and sidewalk bonds maturing in 2039 were priced to yield 5.72 percent on Nov. 19 and sold to a customer for 5.71 percent on Nov. 25, according to Municipal Securities Rulemaking Board data.
The city failed to comply with four of 13 standards governing its budgeting during the fiscal year ended Sept. 30, 2008, Auditor General Victor Igwe said in a Nov. 17 report.
Reserve Requirements
Among shortcomings were reserves $289,510 less than required; some agencies exceeding their budgeted spending and the city using non-recurring revenue such as cost-savings from previous years for pension contributions and other expenses.
Regalado said he would ask officials to explain lapses cited in the audit.
“I don’t think the administration is prepared to make a full disclosure of the finances of the city because we haven’t closed out the fiscal year,” he said.
Miami’s fiscal operations were temporarily taken over by the state in 1996 and its bond rating was cut to high-risk, high-yield e “junk” by S&P when unsound budget practices, including using interagency transfers for recurring expenses, created a $68 million budget deficit. The SEC cited Miami for failing to disclose its true financial condition in documents for three bond sales in 1995, before the city asked for state help.
Miami regained its investment-grade rating in 2001, when S&P raised its grade four levels to BBB+ from BB. It was boosted three more steps to A+ in 2004.
European Confidence Improves to Highest in 14 Months
Nov. 27 (Bloomberg) -- European confidence in the economic outlook improved in November to the highest since the collapse of Lehman Brothers Holdings Inc., suggesting the recovery in the 16-nation euro region is gathering strength.
An index of executive and consumer sentiment rose for an eighth straight month to 88.8 from 86.1 in October, the European Commission in Brussels said today. That was the highest since September 2008, when Lehman filed the biggest bankruptcy in U.S. history, compounding the financial crisis.
The euro-area economy emerged from its worst recession in more than 60 years in the third quarter after governments spent billions of euros on stimulus programs and the European Central Bank lowered borrowing costs to near zero. HeidelbergCement AG, Germany’s largest cement maker, said this month that it is “very optimistic” about the outlook. Rising unemployment and a stronger euro are threatening to undermine the recovery.
“It’s a good outcome, supporting evidence that the euro- region economy has embarked on a gradual recovery,” said Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam. “The indicator still has some catching up to do even with the recovery likely to remain moderate.”
The euro was lower against the dollar after the report, trading at $1.4870 at 2:30 p.m. in London, down 1 percent on the day. The yield on the German 10-year benchmark bond was unchanged at 3.16 percent.
Next Year
The global economy may expand 1.9 percent next year and 2.5 percent in 2011, the Organization for Economic Cooperation and Development said on Nov. 19. The Paris-based group previously forecast the economy to grow 0.7 percent in 2010. In the euro region, gross domestic product may rise 0.9 percent next year instead of a previously projected stagnation, the OECD forecast.
Adding to signs of recovery, Europe’s manufacturing and services industries expanded for a fourth month in November and European investors became more optimistic. In Germany, business confidence increased to a 15-month high in November.
Demand is “slowly reviving,” Martin Winterkorn, chief executive officer of Germany’s Porsche SE and Volkswagen AG car manufacturers, said on Nov. 25. “I’m cautiously optimistic on the outlook for 2010.” Rome-based Bulgari SpA, the world’s third-largest jeweler, said on Nov. 12 that it returned to profit in the third quarter on reviving global demand. CEO Francesco Trapani said he expects “a general improvement, especially in the first quarter” of next year.
DAX Index
The Dow Jones Stoxx 50 Index has risen 14 percent this year while Germany’s benchmark DAX Index has increased 2 percent in the past three months, bringing gains to 16 percent in 2009.
ECB President Jean-Claude Trichet said on Nov. 5 that he expects Europe’s economy to gather strength in the second half and recover at a “gradual pace” in 2010. The Frankfurt-based central bank has purchase covered bonds and injected billions of euros into markets to restore lending.
“On the one hand, there are signals that seem to suggest the low point of the crisis is behind us,” ECB council member Nout Wellink said on Nov. 25. “On the other hand, the recovery is fragile and clouded by substantial uncertainties.”
The euro’s 19 percent ascent against the dollar since mid- February is threatening to curb the recovery by making exports less competitive. European officials have urged China to loosen controls on the yuan after the country kept its currency largely unchanged versus the dollar for more than a year, exposing the euro region to the dollar’s slide. Trichet is scheduled to meet Chinese authorities on Nov. 29 in Nanjing to discuss currencies.
Weaker Dollar
“There will be a bit stronger pressure on China even if the point is probably more effectively made behind the scenes,” said Julian Callow, chief European economist at Barclays Capital in London. “I imagine Trichet having gone all this way, that they want to come back with a message that China understands their position and is committed to more flexibility in due course.”
Deutsche Telekom AG Chief Executive Officer Rene Obermann said on Nov. 5 that the company is looking “very carefully” at developments in currency markets. European Aeronautic, Defence & Space & Co., the owner of Airbus SAS, said on Nov. 16 that quarterly profit slumped 77 percent because of a weaker dollar.
With companies cutting costs and eliminating jobs to help shore up earnings, the ECB has signaled it is in no rush to withdraw stimulus measures. The central bank will release its latest forecasts on the economic development and inflation on Dec. 3 when policy makers meet for their monthly rate decision in Frankfurt.
An index of executive and consumer sentiment rose for an eighth straight month to 88.8 from 86.1 in October, the European Commission in Brussels said today. That was the highest since September 2008, when Lehman filed the biggest bankruptcy in U.S. history, compounding the financial crisis.
The euro-area economy emerged from its worst recession in more than 60 years in the third quarter after governments spent billions of euros on stimulus programs and the European Central Bank lowered borrowing costs to near zero. HeidelbergCement AG, Germany’s largest cement maker, said this month that it is “very optimistic” about the outlook. Rising unemployment and a stronger euro are threatening to undermine the recovery.
“It’s a good outcome, supporting evidence that the euro- region economy has embarked on a gradual recovery,” said Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam. “The indicator still has some catching up to do even with the recovery likely to remain moderate.”
The euro was lower against the dollar after the report, trading at $1.4870 at 2:30 p.m. in London, down 1 percent on the day. The yield on the German 10-year benchmark bond was unchanged at 3.16 percent.
Next Year
The global economy may expand 1.9 percent next year and 2.5 percent in 2011, the Organization for Economic Cooperation and Development said on Nov. 19. The Paris-based group previously forecast the economy to grow 0.7 percent in 2010. In the euro region, gross domestic product may rise 0.9 percent next year instead of a previously projected stagnation, the OECD forecast.
Adding to signs of recovery, Europe’s manufacturing and services industries expanded for a fourth month in November and European investors became more optimistic. In Germany, business confidence increased to a 15-month high in November.
Demand is “slowly reviving,” Martin Winterkorn, chief executive officer of Germany’s Porsche SE and Volkswagen AG car manufacturers, said on Nov. 25. “I’m cautiously optimistic on the outlook for 2010.” Rome-based Bulgari SpA, the world’s third-largest jeweler, said on Nov. 12 that it returned to profit in the third quarter on reviving global demand. CEO Francesco Trapani said he expects “a general improvement, especially in the first quarter” of next year.
DAX Index
The Dow Jones Stoxx 50 Index has risen 14 percent this year while Germany’s benchmark DAX Index has increased 2 percent in the past three months, bringing gains to 16 percent in 2009.
ECB President Jean-Claude Trichet said on Nov. 5 that he expects Europe’s economy to gather strength in the second half and recover at a “gradual pace” in 2010. The Frankfurt-based central bank has purchase covered bonds and injected billions of euros into markets to restore lending.
“On the one hand, there are signals that seem to suggest the low point of the crisis is behind us,” ECB council member Nout Wellink said on Nov. 25. “On the other hand, the recovery is fragile and clouded by substantial uncertainties.”
The euro’s 19 percent ascent against the dollar since mid- February is threatening to curb the recovery by making exports less competitive. European officials have urged China to loosen controls on the yuan after the country kept its currency largely unchanged versus the dollar for more than a year, exposing the euro region to the dollar’s slide. Trichet is scheduled to meet Chinese authorities on Nov. 29 in Nanjing to discuss currencies.
Weaker Dollar
“There will be a bit stronger pressure on China even if the point is probably more effectively made behind the scenes,” said Julian Callow, chief European economist at Barclays Capital in London. “I imagine Trichet having gone all this way, that they want to come back with a message that China understands their position and is committed to more flexibility in due course.”
Deutsche Telekom AG Chief Executive Officer Rene Obermann said on Nov. 5 that the company is looking “very carefully” at developments in currency markets. European Aeronautic, Defence & Space & Co., the owner of Airbus SAS, said on Nov. 16 that quarterly profit slumped 77 percent because of a weaker dollar.
With companies cutting costs and eliminating jobs to help shore up earnings, the ECB has signaled it is in no rush to withdraw stimulus measures. The central bank will release its latest forecasts on the economic development and inflation on Dec. 3 when policy makers meet for their monthly rate decision in Frankfurt.
Monday, November 23, 2009
Fed Makes Monitoring Bank Capital Foremost Concern
Nov. 20 (Bloomberg) -- Federal Reserve officials are stepping up scrutiny of the biggest U.S. banks to ensure the lenders can withstand a reversal of soaring global-asset prices, according to people with knowledge of the matter.
Supervisors are examining whether banks such as JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. have enough capital for the risks they take, how much they know about the strength of their counterparties and whether risk managers have authority to influence bank practices and policies.
Lawmakers led by Senator Christopher Dodd have criticized the Fed for failing to prevent a decline in lending standards that contributed to the credit crisis.
The central bank’s monitoring takes on renewed urgency as Chairman Ben S. Bernanke’s pledge to keep the benchmark interest rate near zero for “an extended period” is helping to fuel a surge in assets. The MSCI AC World stock index is up 70 percent since hitting a recession low on March 9. Gold reached an all- time high of $1,150.60 an ounce today.
The policy is raising the “systemic risk” of new asset bubbles, Bill Gross, who runs the world’s largest bond fund at Pacific Investment Management Co., said in a note posted on the Newport Beach, California-based company’s Web site yesterday. Finance officials in Asia say a bubble fueled by the Fed’s low rates has already arrived.
Fed Powers Debated
More taxpayer-funded bailouts following the rescues of insurer American International Group Inc. and Citigroup Inc., the third-largest U.S. bank by assets, would stoke public anger against the Fed as Congress debates whether to reduce its powers and independence. Andrew Stern, president of the Service Employees International Union, led a protest rally of 150 people outside of Goldman Sachs’ Washington office Nov. 16.
“The Fed staff has to be under a massive amount of pressure,” said Vincent Reinhart, a former director of the Fed’s Division of Monetary Affairs and now a resident scholar at the American Enterprise Institute in Washington. “They must have a sense of zero tolerance for failure.”
Banks might not like “leverage ratios or capital requirements, but they can be effective and protect against the really bad behavior,” he said.
Such controls are critical to economic recovery because they can help ensure that large banks aren’t hurt by swings in the capital markets. Banks are still clamping down on credit to consumers and businesses, even though gross domestic product expanded at a 3.5 percent annual pace in the third quarter after a yearlong contraction.
Withstanding Writedowns
“You want to have as much capital in these firms as you possibly can to withstand asset writedowns,” William Cohan, author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street,” about the collapse of Bear Stearns Cos., said in an interview today on Bloomberg Television.
Total loan originations in September at Bank of America Corp., the largest U.S. bank by assets, fell 6 percent to $53.6 billion from a month earlier, according to a Treasury Department report this week. The cause of the decline was “decreased demand for loans in the weak economy as companies and individuals look to reduce debt,” said Scott Silvestri, a spokesman for the Charlotte, North Carolina-based company.
New loans at Wells Fargo & Co., the nation’s fourth-biggest lender by assets, dropped 14 percent to $47.4 billion. “We continued to supply credit to U.S. consumers, small businesses and large corporations with over $547 billion of new credit extended to customers through the third quarter this year,” said Mary Eshet, a spokeswoman for the San Francisco-based bank. “In a slower economic cycle, commercial loan demand is naturally weaker.”
Troubled Asset Program
Taxpayers shored up the financial system with the $700 billion Troubled Asset Relief Program. Another round of bailouts would likely stir up more congressional ire.
“My constituents, they’re not just anxious, they are mad,” Representative Michael Burgess, a Republican from Ft. Worth, Texas, told Treasury Secretary Timothy Geithner at a hearing of the Joint Economic Committee yesterday.
Under the TARP’s capital-purchase program, the Treasury injected about $205 billion into more than 600 financial institutions of all sizes as of Nov. 13, according to department figures.
John Mack, chief executive officer of Morgan Stanley, said banks’ behavior justified a Fed crackdown.
“We cannot control ourselves,” he said yesterday at a panel discussion hosted by Bloomberg News and Vanity Fair at Bloomberg LP’S headquarters in New York. “You have to step in and control the Street.”
Pressure From Dodd
The Fed is already under pressure from Dodd, chairman of the Senate Banking Committee, who proposed legislation Nov. 10 to strip the central bank of its supervisory authority. The Connecticut Democrat’s move strikes at the core of efforts by Bernanke, 55, and Governor Daniel Tarullo, 57, to overhaul Fed supervision and increase monitoring of risks to the financial system.
Tarullo, President Barack Obama’s first appointee to the central bank, is making greater use of so-called horizontal reviews that compare several banks’ exposures and practices.
He is also drawing more on the Fed’s staff of 220 Ph.D. economists to help identify risks. The Fed is now more likely to pull in the economists to run scenarios on what would happen to bank profits if global markets plunged, especially if the central bank’s exams turn up concentrations of risk throughout the financial system.
The Fed is also studying how well banks match funding with the maturity of their assets and how the lenders’ risk managers interact with their trading and loan operations, according to the people familiar with the program.
Fed spokeswoman Barbara Hagenbaugh declined to comment.
Stress Tests
The close attention to banks’ capital adequacy started in July when the Fed began applying some of the lessons it learned from stress tests conducted in May. Those tests showed how the 19 largest lenders would fare in a slower recovery with higher- than-forecast unemployment. Ten companies including Bank of America, Wells Fargo and Citigroup needed additional capital.
Assuring that institutions are strong enough to weather an abrupt turn in asset prices “is critical,” said Deborah Bailey, deputy director of supervision at the Fed’s Board of Governors until June, when she joined Deloitte & Touche LLP in New York as a director. “The Fed is committed to try and get it right.”
Lehman Brothers Collapse
The central bank has been Morgan Stanley’s primary regulator since September 2008, when it became a bank-holding company to gain access to Fed funding after Lehman Brothers Holdings Inc. collapsed.
“We have probably 15 to 20 Fed regulators in our building 24 hours a day,” Mack said. “They test our models. They question everything we do. I’ve never been regulated like that before. It’s a different environment. Someone said to me, ‘What do you think of it?’ I love it.”
Some officials in Asia are questioning whether regulation alone is enough, suggesting the Fed’s record-low federal funds rate -- the central bank’s interest-rate target for overnight loans between banks -- is pushing asset prices in their region too high. Liu Mingkang, chairman of the China Banking Regulatory Commission, warned Nov. 15 of “new, real and insurmountable risks to the recovery of the global economy.”
Continuing the zero-rate policy may lead emerging economies “to overheat and experience financial turmoil,” Bank of Japan Governor Masaaki Shirakawa said in Tokyo Nov. 16. The MSCI Asia Pacific index is up 66 percent since the March 9 low, and Asian countries from Singapore to South Korea are trying to rein in surging property prices.
Capital Controls
Asian policy makers, including officials from India, South Korea and Indonesia, are studying capital controls to limit “hot money” inflows that may stoke asset bubbles and force their currencies to appreciate. Indonesia’s central bank is “seriously” studying a limit on inflows to short-term bills, Senior Deputy Governor Darmin Nasution said Nov. 19. Taiwan last week banned international investors from placing funds in time deposits.
The U.S. shouldn’t adjust monetary policy to account for rising Asian assets, Federal Reserve Bank of St. Louis President James Bullard said Nov. 18. “If there are problems in real- estate markets in Asia, it is not very practical to say you should raise interest rates in the U.S.,” he said.
U.S. investors are concerned, too. They would have to be “joking or smoking -- something” to think the Fed would raise rates with 15 million people out of work, Gross wrote in his note. Pimco had $940.4 billion in assets under management as of Sept. 30, according to its Web site.
Safe Investments
Nevertheless, yields on safe investments such as three- month Treasury bills -- which hit .005 yesterday -- are so low, money managers are increasing the risks they take, and “the legitimate question of the day is, ‘Is a zero-percent funds rate creating the next financial bubble, and if so, will the Fed and other central banks raise rates proactively, even in the face of double-digit unemployment?’” Gross said.
Central bankers are “carefully evaluating” the situation, Bernanke told the Economic Club of New York Nov. 16. “It’s not obvious to me, in any case, that there’s any large misalignments currently in the U.S. financial system.”
He said the “best approach here, if at all possible, is to use supervisory and regulatory methods to restrain undue risk- taking and to make sure the system is resilient in case an asset-price bubble bursts in the future.”
The Standard & Poor’s 500 Index is trading at its highest valuation in seven years after climbing 61 percent from a 12- year low in March. The index is valued at almost 22 times the reported operating profits of its companies, more than twice its price-earnings ratio on March 6.
Internet Bubble
The current ratio is still well below the 30.68 P/E reached the week of March 24, 2000, near the end of the Internet bubble. And as corporate earnings continue to rise, the estimated S&P P/E ratio based on analysts’ forecasts for future earnings falls to 17.35.
Profits at Wall Street banks surged in the third quarter as they risked more of their own capital. Goldman Sachs, which converted to a bank-holding company to get Fed backing during the crisis, said Oct. 15 that profit more than tripled to $3.19 billion from a year earlier on trading gains and investments with the firm’s own money.
Morgan Stanley reported profit of $757 million on Oct. 21, its first in a year, as trading revenue rose to the highest level in 12 months. Earnings for JPMorgan Chase, the second- biggest U.S. bank by assets, were $3.59 billion, the highest since the 2007 collapse of the subprime-mortgage market, as investment-banking revenue helped it overcome losses on consumer loans.
Too Reliant
Fed officials are watching to see if financial companies may become too reliant on short-term funding the longer rates remain at record lows, according to the people familiar with the process. The central bank won’t raise its benchmark until August 2010, according to the median estimate of 45 economists surveyed by Bloomberg.
Former Fed Chairman Alan Greenspan telegraphed increases in his 2004-2005 tightening cycle with a phrase in the Fed statement that said “policy accommodation can be removed at a pace that is likely to be measured.” When asked if investors should be prepared for the possibility of more-abrupt action this time, Charles Plosser, president of the Philadelphia Fed said yes.
“There are states of the world and conditions that could arise where we may have to raise rates a lot faster than the last cycle,” he said in an interview. “I am not saying that will be the case. I am just saying we just have to make the markets understand that we will do that if it is required.”
Supervisors are examining whether banks such as JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. have enough capital for the risks they take, how much they know about the strength of their counterparties and whether risk managers have authority to influence bank practices and policies.
Lawmakers led by Senator Christopher Dodd have criticized the Fed for failing to prevent a decline in lending standards that contributed to the credit crisis.
The central bank’s monitoring takes on renewed urgency as Chairman Ben S. Bernanke’s pledge to keep the benchmark interest rate near zero for “an extended period” is helping to fuel a surge in assets. The MSCI AC World stock index is up 70 percent since hitting a recession low on March 9. Gold reached an all- time high of $1,150.60 an ounce today.
The policy is raising the “systemic risk” of new asset bubbles, Bill Gross, who runs the world’s largest bond fund at Pacific Investment Management Co., said in a note posted on the Newport Beach, California-based company’s Web site yesterday. Finance officials in Asia say a bubble fueled by the Fed’s low rates has already arrived.
Fed Powers Debated
More taxpayer-funded bailouts following the rescues of insurer American International Group Inc. and Citigroup Inc., the third-largest U.S. bank by assets, would stoke public anger against the Fed as Congress debates whether to reduce its powers and independence. Andrew Stern, president of the Service Employees International Union, led a protest rally of 150 people outside of Goldman Sachs’ Washington office Nov. 16.
“The Fed staff has to be under a massive amount of pressure,” said Vincent Reinhart, a former director of the Fed’s Division of Monetary Affairs and now a resident scholar at the American Enterprise Institute in Washington. “They must have a sense of zero tolerance for failure.”
Banks might not like “leverage ratios or capital requirements, but they can be effective and protect against the really bad behavior,” he said.
Such controls are critical to economic recovery because they can help ensure that large banks aren’t hurt by swings in the capital markets. Banks are still clamping down on credit to consumers and businesses, even though gross domestic product expanded at a 3.5 percent annual pace in the third quarter after a yearlong contraction.
Withstanding Writedowns
“You want to have as much capital in these firms as you possibly can to withstand asset writedowns,” William Cohan, author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street,” about the collapse of Bear Stearns Cos., said in an interview today on Bloomberg Television.
Total loan originations in September at Bank of America Corp., the largest U.S. bank by assets, fell 6 percent to $53.6 billion from a month earlier, according to a Treasury Department report this week. The cause of the decline was “decreased demand for loans in the weak economy as companies and individuals look to reduce debt,” said Scott Silvestri, a spokesman for the Charlotte, North Carolina-based company.
New loans at Wells Fargo & Co., the nation’s fourth-biggest lender by assets, dropped 14 percent to $47.4 billion. “We continued to supply credit to U.S. consumers, small businesses and large corporations with over $547 billion of new credit extended to customers through the third quarter this year,” said Mary Eshet, a spokeswoman for the San Francisco-based bank. “In a slower economic cycle, commercial loan demand is naturally weaker.”
Troubled Asset Program
Taxpayers shored up the financial system with the $700 billion Troubled Asset Relief Program. Another round of bailouts would likely stir up more congressional ire.
“My constituents, they’re not just anxious, they are mad,” Representative Michael Burgess, a Republican from Ft. Worth, Texas, told Treasury Secretary Timothy Geithner at a hearing of the Joint Economic Committee yesterday.
Under the TARP’s capital-purchase program, the Treasury injected about $205 billion into more than 600 financial institutions of all sizes as of Nov. 13, according to department figures.
John Mack, chief executive officer of Morgan Stanley, said banks’ behavior justified a Fed crackdown.
“We cannot control ourselves,” he said yesterday at a panel discussion hosted by Bloomberg News and Vanity Fair at Bloomberg LP’S headquarters in New York. “You have to step in and control the Street.”
Pressure From Dodd
The Fed is already under pressure from Dodd, chairman of the Senate Banking Committee, who proposed legislation Nov. 10 to strip the central bank of its supervisory authority. The Connecticut Democrat’s move strikes at the core of efforts by Bernanke, 55, and Governor Daniel Tarullo, 57, to overhaul Fed supervision and increase monitoring of risks to the financial system.
Tarullo, President Barack Obama’s first appointee to the central bank, is making greater use of so-called horizontal reviews that compare several banks’ exposures and practices.
He is also drawing more on the Fed’s staff of 220 Ph.D. economists to help identify risks. The Fed is now more likely to pull in the economists to run scenarios on what would happen to bank profits if global markets plunged, especially if the central bank’s exams turn up concentrations of risk throughout the financial system.
The Fed is also studying how well banks match funding with the maturity of their assets and how the lenders’ risk managers interact with their trading and loan operations, according to the people familiar with the program.
Fed spokeswoman Barbara Hagenbaugh declined to comment.
Stress Tests
The close attention to banks’ capital adequacy started in July when the Fed began applying some of the lessons it learned from stress tests conducted in May. Those tests showed how the 19 largest lenders would fare in a slower recovery with higher- than-forecast unemployment. Ten companies including Bank of America, Wells Fargo and Citigroup needed additional capital.
Assuring that institutions are strong enough to weather an abrupt turn in asset prices “is critical,” said Deborah Bailey, deputy director of supervision at the Fed’s Board of Governors until June, when she joined Deloitte & Touche LLP in New York as a director. “The Fed is committed to try and get it right.”
Lehman Brothers Collapse
The central bank has been Morgan Stanley’s primary regulator since September 2008, when it became a bank-holding company to gain access to Fed funding after Lehman Brothers Holdings Inc. collapsed.
“We have probably 15 to 20 Fed regulators in our building 24 hours a day,” Mack said. “They test our models. They question everything we do. I’ve never been regulated like that before. It’s a different environment. Someone said to me, ‘What do you think of it?’ I love it.”
Some officials in Asia are questioning whether regulation alone is enough, suggesting the Fed’s record-low federal funds rate -- the central bank’s interest-rate target for overnight loans between banks -- is pushing asset prices in their region too high. Liu Mingkang, chairman of the China Banking Regulatory Commission, warned Nov. 15 of “new, real and insurmountable risks to the recovery of the global economy.”
Continuing the zero-rate policy may lead emerging economies “to overheat and experience financial turmoil,” Bank of Japan Governor Masaaki Shirakawa said in Tokyo Nov. 16. The MSCI Asia Pacific index is up 66 percent since the March 9 low, and Asian countries from Singapore to South Korea are trying to rein in surging property prices.
Capital Controls
Asian policy makers, including officials from India, South Korea and Indonesia, are studying capital controls to limit “hot money” inflows that may stoke asset bubbles and force their currencies to appreciate. Indonesia’s central bank is “seriously” studying a limit on inflows to short-term bills, Senior Deputy Governor Darmin Nasution said Nov. 19. Taiwan last week banned international investors from placing funds in time deposits.
The U.S. shouldn’t adjust monetary policy to account for rising Asian assets, Federal Reserve Bank of St. Louis President James Bullard said Nov. 18. “If there are problems in real- estate markets in Asia, it is not very practical to say you should raise interest rates in the U.S.,” he said.
U.S. investors are concerned, too. They would have to be “joking or smoking -- something” to think the Fed would raise rates with 15 million people out of work, Gross wrote in his note. Pimco had $940.4 billion in assets under management as of Sept. 30, according to its Web site.
Safe Investments
Nevertheless, yields on safe investments such as three- month Treasury bills -- which hit .005 yesterday -- are so low, money managers are increasing the risks they take, and “the legitimate question of the day is, ‘Is a zero-percent funds rate creating the next financial bubble, and if so, will the Fed and other central banks raise rates proactively, even in the face of double-digit unemployment?’” Gross said.
Central bankers are “carefully evaluating” the situation, Bernanke told the Economic Club of New York Nov. 16. “It’s not obvious to me, in any case, that there’s any large misalignments currently in the U.S. financial system.”
He said the “best approach here, if at all possible, is to use supervisory and regulatory methods to restrain undue risk- taking and to make sure the system is resilient in case an asset-price bubble bursts in the future.”
The Standard & Poor’s 500 Index is trading at its highest valuation in seven years after climbing 61 percent from a 12- year low in March. The index is valued at almost 22 times the reported operating profits of its companies, more than twice its price-earnings ratio on March 6.
Internet Bubble
The current ratio is still well below the 30.68 P/E reached the week of March 24, 2000, near the end of the Internet bubble. And as corporate earnings continue to rise, the estimated S&P P/E ratio based on analysts’ forecasts for future earnings falls to 17.35.
Profits at Wall Street banks surged in the third quarter as they risked more of their own capital. Goldman Sachs, which converted to a bank-holding company to get Fed backing during the crisis, said Oct. 15 that profit more than tripled to $3.19 billion from a year earlier on trading gains and investments with the firm’s own money.
Morgan Stanley reported profit of $757 million on Oct. 21, its first in a year, as trading revenue rose to the highest level in 12 months. Earnings for JPMorgan Chase, the second- biggest U.S. bank by assets, were $3.59 billion, the highest since the 2007 collapse of the subprime-mortgage market, as investment-banking revenue helped it overcome losses on consumer loans.
Too Reliant
Fed officials are watching to see if financial companies may become too reliant on short-term funding the longer rates remain at record lows, according to the people familiar with the process. The central bank won’t raise its benchmark until August 2010, according to the median estimate of 45 economists surveyed by Bloomberg.
Former Fed Chairman Alan Greenspan telegraphed increases in his 2004-2005 tightening cycle with a phrase in the Fed statement that said “policy accommodation can be removed at a pace that is likely to be measured.” When asked if investors should be prepared for the possibility of more-abrupt action this time, Charles Plosser, president of the Philadelphia Fed said yes.
“There are states of the world and conditions that could arise where we may have to raise rates a lot faster than the last cycle,” he said in an interview. “I am not saying that will be the case. I am just saying we just have to make the markets understand that we will do that if it is required.”
Fed Audit Shield Takes Blow After Ron Paul Proposal Advances
Nov. 20 (Bloomberg) -- The Federal Reserve’s shield from congressional audits of interest-rate decisions took a blow from lawmakers who want to open the central bank’s books to greater congressional scrutiny.
The House Financial Services Committee yesterday advanced a proposal to remove a three-decade ban on audits of monetary policy and carry out an examination of the central bank. The plan was offered by Representative Ron Paul, a Republican from Texas who has called for the abolition of the Fed, and based on a bill with more than 300 co-sponsors.
Lawmakers say the Fed hasn’t adequately accounted for putting taxpayer funds at risk, including aid to companies such as Citigroup Inc. and American International Group Inc. Fed Chairman Ben S. Bernanke has opposed the Paul legislation, saying it may open the door to interference in monetary policy.
Yesterday’s vote is “probably not going to be helpful in terms of keeping inflation expectations low and supporting the dollar,” said Michael Feroli, a JPMorgan Chase & Co. economist in New York and former Fed researcher. The central bank “should do whatever it takes to stop this from going forward and eroding confidence in the Fed’s independence,” he said.
The broader bill on financial regulation is subject to a vote by the committee, then must be approved by the House and Senate and signed into law by President Barack Obama.
“This is the bill that would allow the people to win over the special interests,” Paul said during debate on the measures yesterday. “There is no doubt that the individuals opposing this amendment represent the secrecy of the Federal Reserve.” An audit “shouldn’t hurt them in any way,” he said.
‘May Be Revisited’
Barney Frank, the Massachusetts Democrat who chairs the committee and opposed the Paul measure, said the issue “may be revisited” when the legislation reaches the House floor.
“It’s going to be seen as weakening the independence of monetary policy with consequent negative implications,” Frank told reporters after the vote. “People are going to be worried about the impact on the dollar, on the interest rate.”
The dollar strengthened to $1.4925 per euro late yesterday from $1.4963. The dollar has weakened 6.5 percent against the euro this year.
Paul, who wrote a best-selling book this year titled “End the Fed,” said provisions in his amendment would limit interference in monetary policy. The measure, co-sponsored by Representative Alan Grayson, a Democrat from Florida, would exclude any unreleased transcripts or minutes of Fed policy meetings. It calls for an audit of the Fed and its 12 regional banks by the Government Accountability Office within a year after enactment.
Limited Audits
The committee voted first, 43-26, to substitute Paul’s proposal for a Democratic measure to retain the ban on audits of monetary policy while requiring more limited audits. About one- third of Democrats joined the unanimous Republicans on the vote. Then, in a voice vote, the committee attached the Paul measure to the broader bill.
Frank said he expects to finish the legislation in committee on Dec. 1, delaying a vote he had scheduled for yesterday until after lawmakers return from the Thanksgiving holiday. He supported a competing measure from Representative Mel Watt, a North Carolina Democrat, to retain the ban on auditing monetary policy.
“Perception is very important in monetary policy,” Frank said. He said he was concerned that “inflationary expectations will be given a boost if we adopt the Paul” measure.
The Fed’s powers and rate-setting independence are under threat on several fronts in Congress. Separately yesterday, the Senate Banking Committee began debate on legislation that would strip the Fed of bank-supervision powers and give lawmakers greater say in naming the officials who vote on monetary policy.
Lax Oversight
Paul and other lawmakers have accused the Fed of lax oversight of banks and failing to avert the financial crisis. He said Watt’s measure instead would put further restrictions on the power of the government to audit the Fed, contrary to its sponsor’s assertion.
“This actually takes away some auditing authority,” said Paul. “This amendment eliminates all the benefits that people see coming from” Paul’s legislation, he said.
Watt cautioned against succumbing to popular anger at the Fed during debate on the measures.
“Everybody would like to beat up on the Fed and call them the bad guys,” Watt said. “So if we make this decision on a political basis, I know what the result will be.”
Also yesterday, lawmakers attached, by voice vote, a separate Republican measure to audit all Fed emergency-loan actions “during the current economic crisis.” Legislators may need to work out how to combine the amendments when the bill goes to the House floor.
The House Financial Services Committee yesterday advanced a proposal to remove a three-decade ban on audits of monetary policy and carry out an examination of the central bank. The plan was offered by Representative Ron Paul, a Republican from Texas who has called for the abolition of the Fed, and based on a bill with more than 300 co-sponsors.
Lawmakers say the Fed hasn’t adequately accounted for putting taxpayer funds at risk, including aid to companies such as Citigroup Inc. and American International Group Inc. Fed Chairman Ben S. Bernanke has opposed the Paul legislation, saying it may open the door to interference in monetary policy.
Yesterday’s vote is “probably not going to be helpful in terms of keeping inflation expectations low and supporting the dollar,” said Michael Feroli, a JPMorgan Chase & Co. economist in New York and former Fed researcher. The central bank “should do whatever it takes to stop this from going forward and eroding confidence in the Fed’s independence,” he said.
The broader bill on financial regulation is subject to a vote by the committee, then must be approved by the House and Senate and signed into law by President Barack Obama.
“This is the bill that would allow the people to win over the special interests,” Paul said during debate on the measures yesterday. “There is no doubt that the individuals opposing this amendment represent the secrecy of the Federal Reserve.” An audit “shouldn’t hurt them in any way,” he said.
‘May Be Revisited’
Barney Frank, the Massachusetts Democrat who chairs the committee and opposed the Paul measure, said the issue “may be revisited” when the legislation reaches the House floor.
“It’s going to be seen as weakening the independence of monetary policy with consequent negative implications,” Frank told reporters after the vote. “People are going to be worried about the impact on the dollar, on the interest rate.”
The dollar strengthened to $1.4925 per euro late yesterday from $1.4963. The dollar has weakened 6.5 percent against the euro this year.
Paul, who wrote a best-selling book this year titled “End the Fed,” said provisions in his amendment would limit interference in monetary policy. The measure, co-sponsored by Representative Alan Grayson, a Democrat from Florida, would exclude any unreleased transcripts or minutes of Fed policy meetings. It calls for an audit of the Fed and its 12 regional banks by the Government Accountability Office within a year after enactment.
Limited Audits
The committee voted first, 43-26, to substitute Paul’s proposal for a Democratic measure to retain the ban on audits of monetary policy while requiring more limited audits. About one- third of Democrats joined the unanimous Republicans on the vote. Then, in a voice vote, the committee attached the Paul measure to the broader bill.
Frank said he expects to finish the legislation in committee on Dec. 1, delaying a vote he had scheduled for yesterday until after lawmakers return from the Thanksgiving holiday. He supported a competing measure from Representative Mel Watt, a North Carolina Democrat, to retain the ban on auditing monetary policy.
“Perception is very important in monetary policy,” Frank said. He said he was concerned that “inflationary expectations will be given a boost if we adopt the Paul” measure.
The Fed’s powers and rate-setting independence are under threat on several fronts in Congress. Separately yesterday, the Senate Banking Committee began debate on legislation that would strip the Fed of bank-supervision powers and give lawmakers greater say in naming the officials who vote on monetary policy.
Lax Oversight
Paul and other lawmakers have accused the Fed of lax oversight of banks and failing to avert the financial crisis. He said Watt’s measure instead would put further restrictions on the power of the government to audit the Fed, contrary to its sponsor’s assertion.
“This actually takes away some auditing authority,” said Paul. “This amendment eliminates all the benefits that people see coming from” Paul’s legislation, he said.
Watt cautioned against succumbing to popular anger at the Fed during debate on the measures.
“Everybody would like to beat up on the Fed and call them the bad guys,” Watt said. “So if we make this decision on a political basis, I know what the result will be.”
Also yesterday, lawmakers attached, by voice vote, a separate Republican measure to audit all Fed emergency-loan actions “during the current economic crisis.” Legislators may need to work out how to combine the amendments when the bill goes to the House floor.
California Was Among States With Record Unemployment
Nov. 20 (Bloomberg) -- California, Delaware, South Carolina and Florida registered record rates of unemployment in October as weakness in the labor market stretches from coast to coast and limits the economic recovery.
Joblessness rose in 29 U.S. states last month compared with 22 in September, the Labor Department said today in Washington. Michigan had the highest jobless rate at 15.1 percent, followed by Nevada at 13 percent and Rhode Island at 12.9 percent.
The national rate last month reached a 26-year high of 10.2 percent, weighing on consumer spending that accounts for about 70 percent of the economy. Federal Reserve Chairman Ben S. Bernanke said Nov. 17 that joblessness “likely will decline only slowly,” a reason policy makers will keep interest rates near zero to ensure growth is sustained.
“We’ve had a surprisingly sharp jump in the jobless rate,” said Richard DeKaser, president of Woodley Park Research in Washington. “Businesses have truly been doing an extraordinary job of wringing out productivity from the labor force.”
Stocks fell for a third day, with the Standard & Poor’s 500 Index declining 0.3 percent to 1,091.38 at 4:03 p.m. in New York. Dell Inc., the third-largest maker of personal computers, dropped 10 percent after reporting a 54 percent drop in profit.
Declines in 13 States
The unemployment rate fell in 13 states, including Massachusetts, where it declined to 8.9 percent from 9.3 percent; New Hampshire, with a drop to 6.8 percent from 7.2 percent; and West Virginia, which fell to 8.5 percent from 8.9 percent.
The number of states with at least 10 percent unemployment held at 14 last month, the Labor Department’s report showed. The states reporting a record jobless rate were California at 12.5 percent, South Carolina at 12.1 percent, Florida at 11.2 percent and Delaware at 8.7 percent. The District of Columbia also set a high with an 11.9 percent rate.
“Virtually every sector aside from the health-care sector is losing jobs,” said Sean Snaith, University of Central Florida economist in Orlando. “Housing has been central to Florida’s economic story throughout the entire cycle. Unfortunately, it has spread well beyond the sectors directly involved in the housing market.”
President Barack Obama on Nov. 6 signed into law a plan to extend jobless benefits, expand a tax credit for first-time homebuyers and provide tax refunds to money-losing companies. The measure gives jobless people as many as 20 additional weeks of unemployment assistance.
The president has also announced plans to convene a jobs summit at the White House next month.
State Payrolls
Payrolls declined last month in 21 states, today’s report showed. New York showed the biggest drop, with a loss of 15,300. Florida had 8,500 job losses, followed by Georgia with 7,500 and Virginia with 7,100.
“When you apply for a job, because there are so many other people looking for jobs, you have to be the absolute perfect candidate and lucky, or be someone’s brother-in-law, to get a job,” said Mary Kough of Tellico Plains, Tennessee. “In this economy there are very few jobs for which to even apply.”
Kough has been looking for work for four months, applying for as many as 25 positions. She’s been interviewed once. The 47-year-old said she has about 20 years of experience, including jobs as a customer service manager, supervisor and purchasing agent. Tennessee’s unemployment rate held at 10.5 percent in October, the Labor Department’s report showed.
Taking Comfort
“I try not to get discouraged,” Kough said. “I know that you will get a certain percentage of what you apply for, and since there are less jobs to apply for, I know it will just take a little longer. I take comfort in knowing that. I have faith.”
Applied Materials Inc. is among companies still planning to cut jobs. The world’s biggest maker of chip equipment, based in Santa Clara, California, said Nov. 11 it plans to eliminate as many as 1,500 positions within 18 months.
Over the last year, California showed the biggest loss of jobs, with payrolls falling by 687,700 workers, today’s report showed.
Nationally, payrolls fell by 190,000 in October, the Labor Department said Nov. 6. The U.S. has lost 7.3 million jobs since the start of the recession in December 2007, the most of any downturn since the Great Depression.
Other measures corroborate that while firms are firing fewer workers, it is harder for the unemployed to find work. The number of people getting extended payments jumped in the week ended Oct. 31 even as the number of Americans filing first-time claims for unemployment benefits held at a 10-month low last week, according to government data released yesterday.
U.S. Financial Regulation Overhaul: Side-by-Side Comparison
Nov. 20 (Bloomberg) -- President Barack Obama handed the U.S. Congress a road map for an overhaul of financial-services regulation in June, including greater oversight of derivatives and system-wide risks, new ways to wind down failed companies and a consumer agency to regulate credit cards and mortgages.
The House Financial Services Committee divided the proposal into seven pieces, and completed most of its work yesterday. The committee put off to next month consideration of measures dealing with firms considered too big to fail and the creation of a national insurance office. Representative Barney Frank, Democrat of Massachusetts, plans to repackage the pieces into one measure, and send that to the House floor in December.
Progress has been slower in the Senate, where Christopher Dodd, Democrat of Connecticut, is taking the lead and so far has offered a draft proposal on Nov. 10. Dodd is expected to begin work on his draft in early December, a pace that means Congress is unlikely to complete work this year.
Obama and Congress both aim to prevent a relapse of the regulatory failures that helped lead to a near-collapse of the economy. They disagree on many of the details, as do Frank and Dodd. Here is where the major pieces now stand:
DERIVATIVES
OBAMA -- The administration wants to regulate the $605 trillion over-the-counter market for credit-default swaps and other instruments used to manage risk, by forcing transactions out of the shadows and onto regulated trading platforms. Dealers and corporate end-users would have to post collateral and comply with margin rules, increasing costs.
Obama would require only standardized derivatives -- not those custom-made for a single client -- to be traded on a regulated system. The exemption for tailor-made contracts means 40 percent to 60 percent of derivatives would be less regulated, though they would have to follow new capital rules.
HOUSE -- Two committees have jurisdiction, Financial Services, led by Frank, and Agriculture, led by Collin Peterson of Minnesota. Both approved bills that mirror the Obama exemption for custom derivatives. Unlike Obama, both committees would exempt corporate end-users like Delta Air Lines Inc., as well as hedge funds like Citadel Investment Group LLC, from trading, clearing, collateral and margin requirements. End-users account for less than 15 percent of derivatives trades.
SENATE -- In his draft proposal, Dodd would require more trades to take place on regulated platforms than either the Obama or House proposals. The Senate Agriculture Committee, which shares jurisdiction, is expected to offer a proposal next week.
INDUSTRY -- Wall Street firms are fighting back, claiming all the proposals would make derivatives too costly. Regulators say the firms are also worried that disclosure will demystify the business, leading to more competition, lower prices and less profit.
CONSUMER PROTECTION
OBAMA -- The president wants to create an agency to protect consumers from unfair practices by sellers of financial products like mortgages and credit cards. The new agency would take consumer-protection powers from the Fed, Federal Deposit Insurance Corp. and other regulators, a move those agencies oppose.
HOUSE -- The Financial Services Committee approved in October a proposal that would scale back Obama’s plan by exempting retailers, lawyers, auto dealers and real-estate brokers. Companies would not have to offer low-cost, “plain vanilla” products or assess a consumer’s ability to understand them -- two Obama provisions the banking industry lobbied to block.
The committee agreed not to preempt tougher state laws, so long as they do not have a “discriminatory effect” on a national bank. The committee also exempted small lenders with up to $10 billion in assets from CFPA supervision, though they would still have to follow CFPA rules, which bank regulators would enforce.
SENATE -- Dodd proposed a consumer agency modeled after the Obama proposal in his draft. One obstacle is Senator Richard Shelby of Alabama, the committee’s top Republican, who opposes a stand-alone consumer agency.
INDUSTRY -- The financial industry opposes the CFPA, saying it would raise costs and limit consumer choice. The industry also argues that letting states impose tougher rules would result in a patchwork of state laws and unnecessary compliance costs.
TOO BIG TO FAIL
OBAMA -- The White House originally would have made the Federal Reserve the regulator of large companies whose leverage and complexity threaten the financial system. While he didn’t name the companies, Obama’s list would likely include the 20 or so biggest banks and insurers and perhaps hedge funds and private equity firms.
The Obama plan also called for a council of regulators to monitor the economy for systemic risks and for the Treasury to decide if a company has grown so risky that it should be wound down. The FDIC would have the power to resolve, or take apart, a large company that is near or in default. The biggest financial firms would be assessed fees to pay for such resolutions after they occur.
HOUSE -- The Financial Services Committee would also make the Fed the regulator of the biggest firms, although in a somewhat reduced role. Other regulators would oversee systemic risks by the companies in their areas. The Fed would be part of a council of regulators, along with the FDIC, the Comptroller of the Currency and the Securities and Exchange Commission, which would have enhanced powers to identify companies that need tighter regulation and more capital. In conflict with Obama, Frank agrees with FDIC Chairman Sheila Bair that firms should pay into a resolution fund -- before any failure.
An amendment by Democratic Representative Paul Kanjorski of Pennsylvania that Frank’s panel adopted on Nov. 18 would let the council of regulators preemptively break apart large firms, even if they are healthy, if their collapse would put the economy at risk. The administration prefers that regulators require only troubled companies to shrink.
SENATE -- The Dodd draft would create a single regulator for banks. Instead of a council of regulators overseeing systemic risks, Dodd would have an Agency for Financial Stability, led by a nine-member board, monitor risks and determine which companies pose a threat to the economy and thus need tighter supervision. Like Obama and the House bill, Dodd would give the FDIC the role of resolving companies when they fail. Unlike his House counterpart, Dodd would make financial companies with more than $10 billion in assets cover the costs of winding down a failed company -- after the fact.
INDUSTRY -- The financial industry opposes the Kanjorski idea of letting regulators preemptively break up big, risky companies and also opposes pre-payments into the resolution fund because it believes that would unnecessarily tie up capital.
BANK REGULATION
OBAMA -- The administration originally proposed a merger of two agencies -- the Office of Thrift Supervision and the Office of the Comptroller of the Currency. He would have eliminated the thrift charter and left intact the Federal Reserve, which supervises bank holding companies and some state banks, as well as the FDIC, which also regulates some state banks.
HOUSE -- The Financial Services Committee and the Treasury agreed on a plan last month that would continue to merge OTS into the OCC. It would retain the thrift charter Obama proposed dropping.
SENATE -- Dodd, rejecting the Obama concept altogether, proposed a single bank regulator by merging four agencies into a Financial Institutions Regulatory Administration. The central bank would be stripped of all bank supervisory power and relegated to setting only monetary policy. Dodd wipes out OCC and OTS and strips bank regulation from the FDIC, giving those powers to the new agency. The consolidation, Dodd says, would stop banks from regulator-shopping.
INDUSTRY -- Bankers argue that a single regulator would undermine the two-tiered, federal-state banking system and would focus more on big banks to the detriment of community banks.
INVESTOR PROTECTION
OBAMA -- The president wants Wall Street brokers to be subject to a fiduciary duty, a legal standard requiring them to put clients’ financial interests above their own, as money managers already must do. He wants Congress to give the SEC the power to ban pay structures that give brokers incentives to sell products not in their clients’ interests. And he wants the SEC to be able to ban the practice in which consumers must agree to resolve disputes with brokers through arbitration, not litigation. Shareholder groups claim arbitration is biased because panels include an industry representative and the group that oversees arbitration, the Financial Industry Regulatory Authority, is Wall Street-funded.
HOUSE -- The Financial Services Committee approved legislation in line with Obama’s proposal on brokerage-firm regulation and mandatory arbitration.
SENATE -- Dodd’s proposal also largely echoes the administration’s.
INDUSTRY -- The securities industry says it supports a fiduciary standard, but has lobbied for a weaker requirement than that imposed on money managers. Wall Street is also lobbying against a ban on arbitration clauses.
EXECUTIVE PAY
OBAMA -- The administration, regulators and lawmakers are all pushing companies to adopt pay practices tying compensation to risk. The idea is to ban pay that allows executives and traders to make millions of dollars on the front end of transactions that later blow up. The legislative proposals fall short of mandating dollar limits. Obama would require companies to offer to shareholders a “say-on-pay,” a nonbinding vote on executive packages.
HOUSE -- Financial Services Committee Chairman Frank offered legislation that would require regulators to ban practices that encourage inappropriate risks by companies that could threaten the economy. The legislation, approved by the House on July 31, also requires publicly traded companies to allow say-on-pay.
SENATE -- Dodd’s draft legislation would require the say-on-pay votes. It would not require regulators to ban inappropriate risks in compensation practices.
INDUSTRY -- As public outrage over bailouts and bonuses build, the financial industry is agreeing to emphasize long-term incentive pay, for example by putting a larger portion of compensation in stock and restricting when the shares can be sold. Large Wall Street banks aren’t publicly opposing say-on- pay legislation.
CREDIT RATINGS
OBAMA -- Companies such as Moody’s Investors Service and Standard & Poor’s have drawn fire for putting investment-grade stamps on what turned out to be toxic mortgage securities. Obama wants to create an office within the SEC to supervise credit- rating companies and he wants ratings for mortgage-backed bonds and similar structured products to carry different symbols than the letters used to grade corporate and municipal debt.
HOUSE -- The Financial Services Committee broke with the administration by approving legislation last month that would make it easier for investors to sue credit-rating companies. The measure also would require ratings firms to disclose more about their compensation plans.
SENATE -- Dodd’s legislation, like the House’s, would let investors sue ratings companies for knowingly failing to scrutinize the loans that make up structured securities. Dodd would also let the SEC revoke the registration of a ratings firm for “bad ratings.”
INDUSTRY -- Credit-rating company executives have testified in Congress against the increased liability standards.
The House Financial Services Committee divided the proposal into seven pieces, and completed most of its work yesterday. The committee put off to next month consideration of measures dealing with firms considered too big to fail and the creation of a national insurance office. Representative Barney Frank, Democrat of Massachusetts, plans to repackage the pieces into one measure, and send that to the House floor in December.
Progress has been slower in the Senate, where Christopher Dodd, Democrat of Connecticut, is taking the lead and so far has offered a draft proposal on Nov. 10. Dodd is expected to begin work on his draft in early December, a pace that means Congress is unlikely to complete work this year.
Obama and Congress both aim to prevent a relapse of the regulatory failures that helped lead to a near-collapse of the economy. They disagree on many of the details, as do Frank and Dodd. Here is where the major pieces now stand:
DERIVATIVES
OBAMA -- The administration wants to regulate the $605 trillion over-the-counter market for credit-default swaps and other instruments used to manage risk, by forcing transactions out of the shadows and onto regulated trading platforms. Dealers and corporate end-users would have to post collateral and comply with margin rules, increasing costs.
Obama would require only standardized derivatives -- not those custom-made for a single client -- to be traded on a regulated system. The exemption for tailor-made contracts means 40 percent to 60 percent of derivatives would be less regulated, though they would have to follow new capital rules.
HOUSE -- Two committees have jurisdiction, Financial Services, led by Frank, and Agriculture, led by Collin Peterson of Minnesota. Both approved bills that mirror the Obama exemption for custom derivatives. Unlike Obama, both committees would exempt corporate end-users like Delta Air Lines Inc., as well as hedge funds like Citadel Investment Group LLC, from trading, clearing, collateral and margin requirements. End-users account for less than 15 percent of derivatives trades.
SENATE -- In his draft proposal, Dodd would require more trades to take place on regulated platforms than either the Obama or House proposals. The Senate Agriculture Committee, which shares jurisdiction, is expected to offer a proposal next week.
INDUSTRY -- Wall Street firms are fighting back, claiming all the proposals would make derivatives too costly. Regulators say the firms are also worried that disclosure will demystify the business, leading to more competition, lower prices and less profit.
CONSUMER PROTECTION
OBAMA -- The president wants to create an agency to protect consumers from unfair practices by sellers of financial products like mortgages and credit cards. The new agency would take consumer-protection powers from the Fed, Federal Deposit Insurance Corp. and other regulators, a move those agencies oppose.
HOUSE -- The Financial Services Committee approved in October a proposal that would scale back Obama’s plan by exempting retailers, lawyers, auto dealers and real-estate brokers. Companies would not have to offer low-cost, “plain vanilla” products or assess a consumer’s ability to understand them -- two Obama provisions the banking industry lobbied to block.
The committee agreed not to preempt tougher state laws, so long as they do not have a “discriminatory effect” on a national bank. The committee also exempted small lenders with up to $10 billion in assets from CFPA supervision, though they would still have to follow CFPA rules, which bank regulators would enforce.
SENATE -- Dodd proposed a consumer agency modeled after the Obama proposal in his draft. One obstacle is Senator Richard Shelby of Alabama, the committee’s top Republican, who opposes a stand-alone consumer agency.
INDUSTRY -- The financial industry opposes the CFPA, saying it would raise costs and limit consumer choice. The industry also argues that letting states impose tougher rules would result in a patchwork of state laws and unnecessary compliance costs.
TOO BIG TO FAIL
OBAMA -- The White House originally would have made the Federal Reserve the regulator of large companies whose leverage and complexity threaten the financial system. While he didn’t name the companies, Obama’s list would likely include the 20 or so biggest banks and insurers and perhaps hedge funds and private equity firms.
The Obama plan also called for a council of regulators to monitor the economy for systemic risks and for the Treasury to decide if a company has grown so risky that it should be wound down. The FDIC would have the power to resolve, or take apart, a large company that is near or in default. The biggest financial firms would be assessed fees to pay for such resolutions after they occur.
HOUSE -- The Financial Services Committee would also make the Fed the regulator of the biggest firms, although in a somewhat reduced role. Other regulators would oversee systemic risks by the companies in their areas. The Fed would be part of a council of regulators, along with the FDIC, the Comptroller of the Currency and the Securities and Exchange Commission, which would have enhanced powers to identify companies that need tighter regulation and more capital. In conflict with Obama, Frank agrees with FDIC Chairman Sheila Bair that firms should pay into a resolution fund -- before any failure.
An amendment by Democratic Representative Paul Kanjorski of Pennsylvania that Frank’s panel adopted on Nov. 18 would let the council of regulators preemptively break apart large firms, even if they are healthy, if their collapse would put the economy at risk. The administration prefers that regulators require only troubled companies to shrink.
SENATE -- The Dodd draft would create a single regulator for banks. Instead of a council of regulators overseeing systemic risks, Dodd would have an Agency for Financial Stability, led by a nine-member board, monitor risks and determine which companies pose a threat to the economy and thus need tighter supervision. Like Obama and the House bill, Dodd would give the FDIC the role of resolving companies when they fail. Unlike his House counterpart, Dodd would make financial companies with more than $10 billion in assets cover the costs of winding down a failed company -- after the fact.
INDUSTRY -- The financial industry opposes the Kanjorski idea of letting regulators preemptively break up big, risky companies and also opposes pre-payments into the resolution fund because it believes that would unnecessarily tie up capital.
BANK REGULATION
OBAMA -- The administration originally proposed a merger of two agencies -- the Office of Thrift Supervision and the Office of the Comptroller of the Currency. He would have eliminated the thrift charter and left intact the Federal Reserve, which supervises bank holding companies and some state banks, as well as the FDIC, which also regulates some state banks.
HOUSE -- The Financial Services Committee and the Treasury agreed on a plan last month that would continue to merge OTS into the OCC. It would retain the thrift charter Obama proposed dropping.
SENATE -- Dodd, rejecting the Obama concept altogether, proposed a single bank regulator by merging four agencies into a Financial Institutions Regulatory Administration. The central bank would be stripped of all bank supervisory power and relegated to setting only monetary policy. Dodd wipes out OCC and OTS and strips bank regulation from the FDIC, giving those powers to the new agency. The consolidation, Dodd says, would stop banks from regulator-shopping.
INDUSTRY -- Bankers argue that a single regulator would undermine the two-tiered, federal-state banking system and would focus more on big banks to the detriment of community banks.
INVESTOR PROTECTION
OBAMA -- The president wants Wall Street brokers to be subject to a fiduciary duty, a legal standard requiring them to put clients’ financial interests above their own, as money managers already must do. He wants Congress to give the SEC the power to ban pay structures that give brokers incentives to sell products not in their clients’ interests. And he wants the SEC to be able to ban the practice in which consumers must agree to resolve disputes with brokers through arbitration, not litigation. Shareholder groups claim arbitration is biased because panels include an industry representative and the group that oversees arbitration, the Financial Industry Regulatory Authority, is Wall Street-funded.
HOUSE -- The Financial Services Committee approved legislation in line with Obama’s proposal on brokerage-firm regulation and mandatory arbitration.
SENATE -- Dodd’s proposal also largely echoes the administration’s.
INDUSTRY -- The securities industry says it supports a fiduciary standard, but has lobbied for a weaker requirement than that imposed on money managers. Wall Street is also lobbying against a ban on arbitration clauses.
EXECUTIVE PAY
OBAMA -- The administration, regulators and lawmakers are all pushing companies to adopt pay practices tying compensation to risk. The idea is to ban pay that allows executives and traders to make millions of dollars on the front end of transactions that later blow up. The legislative proposals fall short of mandating dollar limits. Obama would require companies to offer to shareholders a “say-on-pay,” a nonbinding vote on executive packages.
HOUSE -- Financial Services Committee Chairman Frank offered legislation that would require regulators to ban practices that encourage inappropriate risks by companies that could threaten the economy. The legislation, approved by the House on July 31, also requires publicly traded companies to allow say-on-pay.
SENATE -- Dodd’s draft legislation would require the say-on-pay votes. It would not require regulators to ban inappropriate risks in compensation practices.
INDUSTRY -- As public outrage over bailouts and bonuses build, the financial industry is agreeing to emphasize long-term incentive pay, for example by putting a larger portion of compensation in stock and restricting when the shares can be sold. Large Wall Street banks aren’t publicly opposing say-on- pay legislation.
CREDIT RATINGS
OBAMA -- Companies such as Moody’s Investors Service and Standard & Poor’s have drawn fire for putting investment-grade stamps on what turned out to be toxic mortgage securities. Obama wants to create an office within the SEC to supervise credit- rating companies and he wants ratings for mortgage-backed bonds and similar structured products to carry different symbols than the letters used to grade corporate and municipal debt.
HOUSE -- The Financial Services Committee broke with the administration by approving legislation last month that would make it easier for investors to sue credit-rating companies. The measure also would require ratings firms to disclose more about their compensation plans.
SENATE -- Dodd’s legislation, like the House’s, would let investors sue ratings companies for knowingly failing to scrutinize the loans that make up structured securities. Dodd would also let the SEC revoke the registration of a ratings firm for “bad ratings.”
INDUSTRY -- Credit-rating company executives have testified in Congress against the increased liability standards.
U.S. Stocks Join Global Retreat as Dell Slumps, Dollar Advances
Nov. 20 (Bloomberg) -- U.S. stocks fell, joining a global retreat, as earnings at Dell Inc. and D.R. Horton Inc. trailed analysts’ estimates and concern grew that European Central Bank policy makers will phase out economic stimulus measures. The dollar rose and two-year Treasury note yields fell to the lowest level of the year as investors sought safer assets.
The Standard & Poor’s 500 Index slipped 0.3 percent to 1,091.38 at 4:03 p.m. in New York as Dell tumbled the most this year to lead declines in technology shares. Europe’s Dow Jones Stoxx 600 Index and the MSCI Asia-Pacific Index dropped for the fourth straight day, the longest streaks in four months. Crude oil declined as the Dollar Index gained as much as 0.8 percent.
“We live in a world where on a day-to-day basis all risk assets move in the same direction, and it’s the opposite direction from the dollar,” said John Kattar, who oversees $1.6 billion as chief investment officer at Eastern Investment Advisors in Boston. “There is a lot of good news built into stock prices, and stocks are more or less fairly valued given the fundamentals.”
U.S. equities fell for a third straight day, with the S&P 500 dropping 0.2 percent over the past five days to cap its first weekly decline since October. The Dow Jones Industrial Average lost 14.28 points, or 0.1 percent, to 10,318.16 and rose 0.5 percent in the week. Declines were limited today as Pfizer Inc. and Merck & Co. led gains in drugmakers while J.M. Smucker Co. paced an advance in consumer staples companies.
Less than 7 billion shares changed hands on U.S. exchanges, the fourth-slowest trading session of the year.
Rebound Stalls
The S&P 500 rose as much as 64 percent from a 12-year low in March, closing at a 13-month high on Nov. 17. The deepest U.S. economic contraction in seven decades ended in the third quarter, when government incentives spurred spending on homes and cars. Corporate profits, which have shrunk for a record nine straight quarters, are projected to rise in the current period, according to analyst estimates compiled by Bloomberg.
Dell, the third-largest maker of personal computers, slid 10 percent to $14.29 after reporting profit decreased by more than half. Technology shares in the S&P 500, the largest among 10 industries, lost 0.6 percent as a group and contributed the most to the retreat.
“In an economy that’s growing slowly, we’re finding some companies that are continuing to execute well and some that are faltering,” said Alan Gayle, senior investment strategist at Ridgeworth Capital Management in Richmond, Virginia. “The market wants to see companies that can deliver on their business model, and it’s pretty clear Dell’s business model isn’t as effective as it has been in years past.” Ridgeworth manages $60 billion.
Builders Slump
D.R. Horton Inc. tumbled 15 percent to $10.37 for the steepest loss in the S&P 500. The second-largest U.S. homebuilder by revenue reported a fourth-quarter loss of 73 cents per share, three times wider than the average estimate of analysts surveyed by Bloomberg. All but one of 12 companies in an index of homebuilders retreated, with Pulte Homes Inc., Lennar Corp. and KB Home each slumping at least 3.4 percent.
J. M. Smucker added 5.4 percent to $56.35. Second-quarter earnings excluding some items were $1.22 a share, 18 percent higher than the average analyst estimate, as sales of Folgers coffee helped boost revenue by 52 percent.
Earnings Season
Per-share earnings topped the average analyst estimate at 80 percent of S&P 500 companies that have released third-quarter results, the biggest share for a full quarter in Bloomberg data going back to 1993. Still, combined profits are down 14 percent from the year-earlier period.
Dillard’s Inc. added 9.7 percent after the department-store chain was raised to “buy” from “hold” and its share price estimate increased to $28 from $13.50 at Deutsche Bank AG, which said the company is positioned better than almost all investors estimate to increase earnings based on merchandising and cost control initiatives.
MetroPCS Communications Inc. climbed 6.5 percent to $6.52 for the biggest gain in the S&P 500 on speculation it may be acquired. Robert Dezego, an analyst at SunTrust Robinson Humphrey Inc. in Atlanta, said MetroPCS is the focus of renewed speculation about mergers in the global telecommunications industry.
Trichet’s Liquidity Concern
European stocks slipped as ECB President Jean-Claude Trichet said the central bank will remove liquidity in order to ensure the bank doesn’t fuel inflation.
“Not all our liquidity measures will be needed to the same extent as in the past,” Trichet said at a conference in Frankfurt today. “Any non-standard measure whose continuation would pose a threat to the achievement of price stability must be undone promptly and unequivocally.”
Trichet has already signaled the ECB is unlikely to renew its offer of 12-month loans to banks after the third installment in December. Council member Guy Quaden indicated this week that the bank may offer fewer three-month and six-month loans next year. At the same time, policy makers have stressed the exit from emergency lending measures doesn’t necessarily imply they will raise interest rates soon.
“Stocks all over the world and all risk asset classes are being driven by this liquidity factor,” which also is reflected in U.S. dollar weakness, Eastern Investment Advisors’ Kattar said.
The Dollar Index, which gauges the dollar against a basket of six major currencies, rose 0.4 percent to 75.607 and climbed as high as 75.879. It rose three out of the last four days after touching a 15-month low on Nov. 16. The U.S. currency gained against all 16 major currencies except the yen. The yen rose against all 16.
Europe, Asia
Europe’s Dow Jones Stoxx 600 Index lost 0.8 percent, led by real-estate and financial shares. Asian shares declined after Sony Corp. said it will take longer to reach its profitability targets. Sony slid 2.4 percent in Tokyo.
Additional strength in the dollar “is the primary near- term risk to equities,” Myles Zyblock, a strategist at RBC Capital Markets in Toronto, wrote in a report today.
Energy companies in the S&P 500 fell 0.9 percent as a group, the biggest decline among the benchmark’s 10 industry groups, as the dollar’s rebound spurred drop in the price of crude oil.
Merck and Pfizer led health-care companies to a 0.6 percent gain, the biggest in the S&P 500.
“Some of the good value, high-quality companies that got left behind over the last year are increasingly getting interest” from investors, said Michael Shinnick, a South Bend, Indiana-based money manager at Wasatch Advisors Inc. Merck is among the holdings of the Wasatch-1st Source Income Equity Fund he helps manage.
The two-year Treasury note yield touched 0.67 percent, the lowest since December, and fell nine basis points this week. Treasury three-month bill rates turned negative yesterday for the first time since December as investors were willing to pay for the safety of the shortest-dated U.S. government assets.
The Standard & Poor’s 500 Index slipped 0.3 percent to 1,091.38 at 4:03 p.m. in New York as Dell tumbled the most this year to lead declines in technology shares. Europe’s Dow Jones Stoxx 600 Index and the MSCI Asia-Pacific Index dropped for the fourth straight day, the longest streaks in four months. Crude oil declined as the Dollar Index gained as much as 0.8 percent.
“We live in a world where on a day-to-day basis all risk assets move in the same direction, and it’s the opposite direction from the dollar,” said John Kattar, who oversees $1.6 billion as chief investment officer at Eastern Investment Advisors in Boston. “There is a lot of good news built into stock prices, and stocks are more or less fairly valued given the fundamentals.”
U.S. equities fell for a third straight day, with the S&P 500 dropping 0.2 percent over the past five days to cap its first weekly decline since October. The Dow Jones Industrial Average lost 14.28 points, or 0.1 percent, to 10,318.16 and rose 0.5 percent in the week. Declines were limited today as Pfizer Inc. and Merck & Co. led gains in drugmakers while J.M. Smucker Co. paced an advance in consumer staples companies.
Less than 7 billion shares changed hands on U.S. exchanges, the fourth-slowest trading session of the year.
Rebound Stalls
The S&P 500 rose as much as 64 percent from a 12-year low in March, closing at a 13-month high on Nov. 17. The deepest U.S. economic contraction in seven decades ended in the third quarter, when government incentives spurred spending on homes and cars. Corporate profits, which have shrunk for a record nine straight quarters, are projected to rise in the current period, according to analyst estimates compiled by Bloomberg.
Dell, the third-largest maker of personal computers, slid 10 percent to $14.29 after reporting profit decreased by more than half. Technology shares in the S&P 500, the largest among 10 industries, lost 0.6 percent as a group and contributed the most to the retreat.
“In an economy that’s growing slowly, we’re finding some companies that are continuing to execute well and some that are faltering,” said Alan Gayle, senior investment strategist at Ridgeworth Capital Management in Richmond, Virginia. “The market wants to see companies that can deliver on their business model, and it’s pretty clear Dell’s business model isn’t as effective as it has been in years past.” Ridgeworth manages $60 billion.
Builders Slump
D.R. Horton Inc. tumbled 15 percent to $10.37 for the steepest loss in the S&P 500. The second-largest U.S. homebuilder by revenue reported a fourth-quarter loss of 73 cents per share, three times wider than the average estimate of analysts surveyed by Bloomberg. All but one of 12 companies in an index of homebuilders retreated, with Pulte Homes Inc., Lennar Corp. and KB Home each slumping at least 3.4 percent.
J. M. Smucker added 5.4 percent to $56.35. Second-quarter earnings excluding some items were $1.22 a share, 18 percent higher than the average analyst estimate, as sales of Folgers coffee helped boost revenue by 52 percent.
Earnings Season
Per-share earnings topped the average analyst estimate at 80 percent of S&P 500 companies that have released third-quarter results, the biggest share for a full quarter in Bloomberg data going back to 1993. Still, combined profits are down 14 percent from the year-earlier period.
Dillard’s Inc. added 9.7 percent after the department-store chain was raised to “buy” from “hold” and its share price estimate increased to $28 from $13.50 at Deutsche Bank AG, which said the company is positioned better than almost all investors estimate to increase earnings based on merchandising and cost control initiatives.
MetroPCS Communications Inc. climbed 6.5 percent to $6.52 for the biggest gain in the S&P 500 on speculation it may be acquired. Robert Dezego, an analyst at SunTrust Robinson Humphrey Inc. in Atlanta, said MetroPCS is the focus of renewed speculation about mergers in the global telecommunications industry.
Trichet’s Liquidity Concern
European stocks slipped as ECB President Jean-Claude Trichet said the central bank will remove liquidity in order to ensure the bank doesn’t fuel inflation.
“Not all our liquidity measures will be needed to the same extent as in the past,” Trichet said at a conference in Frankfurt today. “Any non-standard measure whose continuation would pose a threat to the achievement of price stability must be undone promptly and unequivocally.”
Trichet has already signaled the ECB is unlikely to renew its offer of 12-month loans to banks after the third installment in December. Council member Guy Quaden indicated this week that the bank may offer fewer three-month and six-month loans next year. At the same time, policy makers have stressed the exit from emergency lending measures doesn’t necessarily imply they will raise interest rates soon.
“Stocks all over the world and all risk asset classes are being driven by this liquidity factor,” which also is reflected in U.S. dollar weakness, Eastern Investment Advisors’ Kattar said.
The Dollar Index, which gauges the dollar against a basket of six major currencies, rose 0.4 percent to 75.607 and climbed as high as 75.879. It rose three out of the last four days after touching a 15-month low on Nov. 16. The U.S. currency gained against all 16 major currencies except the yen. The yen rose against all 16.
Europe, Asia
Europe’s Dow Jones Stoxx 600 Index lost 0.8 percent, led by real-estate and financial shares. Asian shares declined after Sony Corp. said it will take longer to reach its profitability targets. Sony slid 2.4 percent in Tokyo.
Additional strength in the dollar “is the primary near- term risk to equities,” Myles Zyblock, a strategist at RBC Capital Markets in Toronto, wrote in a report today.
Energy companies in the S&P 500 fell 0.9 percent as a group, the biggest decline among the benchmark’s 10 industry groups, as the dollar’s rebound spurred drop in the price of crude oil.
Merck and Pfizer led health-care companies to a 0.6 percent gain, the biggest in the S&P 500.
“Some of the good value, high-quality companies that got left behind over the last year are increasingly getting interest” from investors, said Michael Shinnick, a South Bend, Indiana-based money manager at Wasatch Advisors Inc. Merck is among the holdings of the Wasatch-1st Source Income Equity Fund he helps manage.
The two-year Treasury note yield touched 0.67 percent, the lowest since December, and fell nine basis points this week. Treasury three-month bill rates turned negative yesterday for the first time since December as investors were willing to pay for the safety of the shortest-dated U.S. government assets.
Wednesday, November 18, 2009
Forget $100 oil. $80 oil is a problem
Energy prices don't need to rise that much before a fragile consumer-led economy could face another setback.
NEW YORK (Fortune) -- Are cash-strapped American consumers on for another date with energy price misery?
The U.S. economy remains weak and one in six Americans can't find enough work. Yet oil prices have risen steadily this year. A barrel of crude costs $79 and change, more than double its price at the end of 2008.
This year's runup pales in comparison to the one that peaked last summer above $145 a barrel. Even so, some researchers warn we could once again be approaching the point at which rising energy costs will squeeze consumers.
That could complicate recovery in an economy that, despite the tumult of the past two years, remains as consumer-driven as ever.
"If you had to ask me what is the safe driving speed, I'd say $80 a barrel," said Steven Kopits, managing director at energy market forecaster Douglas-Westwood in New York. "We have bigger problems right now, but we shouldn't forget we're still vulnerable to rising oil prices."
After last July's march to triple-digit crude, the recent increases look fairly tame.
The price of a gallon of gas is $2.63 a gallon, according to the latest AAA survey. That's well below the 2008 peak of $4.11 -- but up 25% from a year ago and 63% above last December's low.
What's more, the factors behind this spike seem apt to persist for some time. They include a pickup in global economic activity fueled by massive government spending, a decline in the purchasing power of the dollar as the U.S. holds interest rates near zero, and lack of new oil supplies coming online to meet future demand.
While those trends hardly ensure rising fuel prices, they seem to have been doing their part so far, putting gasoline within striking distance of $3 a gallon.
That's a price that could strain consumers whose spending accounts for two-thirds of economic activity.
"Any time it gets above $3, it's worth watching," said James D. Hamilton, an economics professor at the University of California at San Diego. "When you get to that level, you start to see a change in behavior as budgets get squeezed."
Hamilton said the $3-a-barrel price is noteworthy because it's around the level at which consumers are devoting 6% of their budgets to energy costs. Hitting that point in recent years seems to have prompted Americans to pull back.
Hamilton notes that Americans largely shook off the sharp runup in energy prices earlier this decade, as energy spending remained in the 5% range and homeowners were able to tap home equity lines of credit.
But that window closed when house prices stopped rising and loss-soaked banks started cutting credit.
And though it's futile to single out any one trigger for the recession that started at the end of 2007, the downturn didn't start in earnest until consumers' energy budgets breached the 6% mark in November that year.
As energy prices soared and incomes came under pressure, Americans first stopped buying pickup trucks and then deserted the local car dealer altogether. Car sales plunged in the spring of 2008 before falling off a cliff with the collapse of Lehman Brothers that September.
"The price of oil played a bigger factor in the recession than people seem to be remembering," Hamilton said.
None of this is to say a further rise in energy prices would necessarily send the economy into a tailspin. While consumers are still strapped, behavior changes should make the economy less vulnerable.
U.S. oil consumption has slid 9% since 2007, Kopits notes. Americans also drove 3% fewer miles in the latest year through August than they did two years earlier, according to data from the Transportation Department.
Hamilton points out that car sales reverted to depressed levels after the government's Cash for Clunkers promotion ended in August.
Hillard G. Huntington, executive director at the Energy Modeling Forum at Stanford University, said that while oil markets remain exposed to a possible supply disruption, he believes the memory of last year's record prices is fresh enough that another oil shock is unlikely.
Why oil is so high
"I can see a situation down the road where maybe we should worry, but I don't think we're there yet," said Huntington. "You see the most serious effects when the economy is already experiencing inflation."
But Kopits warns that every recession since 1972 has been associated with an oil price surge that took U.S. oil consumption past 4% of gross domestic product. Today, he said, the magic number to get there is $80.
"The historical record says that when prices went up, the U.S. went into recession fast," he said.
Home construction at lowest point in 6 months
Annual rate of construction falls 10.6% in October in a drop that surprises economists.
NEW YORK (CNNMoney.com) -- Home builders initiated construction of far fewer new homes in October than the month before, a big and unexpected drop for the struggling industry, according to a government report issued Wednesday.
Homebuilders began construction at an annual rate of 529,000 new homes during the month, 10.6% below the revised September rate of 592,000 and 30.7% below the 763,000 rate during October 2008. It was the lowest level of housing starts since April, when the annual rate was 479,000.
New home construction forms a big part of the nation's economy. When people buy new homes, they also purchase many products to fill them.
Fewer new homes being built may be a bad sign that the impact of the government's economic stimulus package may be limited.
NEW YORK (CNNMoney.com) -- Home builders initiated construction of far fewer new homes in October than the month before, a big and unexpected drop for the struggling industry, according to a government report issued Wednesday.
Homebuilders began construction at an annual rate of 529,000 new homes during the month, 10.6% below the revised September rate of 592,000 and 30.7% below the 763,000 rate during October 2008. It was the lowest level of housing starts since April, when the annual rate was 479,000.
New home construction forms a big part of the nation's economy. When people buy new homes, they also purchase many products to fill them.
Fewer new homes being built may be a bad sign that the impact of the government's economic stimulus package may be limited.
Futures head south after disappointing report on housing market. Stock decline expected after 13-month high on Wall Street.
NEW YORK (CNNMoney.com) -- U.S. stocks were set for a weak open on Wednesday after a disappointing report on the housing market knocked the wind out of futures.
The Dow Jones industrial average, S&P 500 and Nasdaq futures were slightly lower just before market open, giving up their modest gains immediately following a housing report that missed expectations.
Futures measure current index values against the perceived future performance, offering guidance on stock performance, though they're not always an accurate barometer.
U.S. stocks closed at 13-month highs for the second day in a row Tuesday, as strength in commodity-linked shares offset weakness in the retail sector.
Philip Isherwood, equities strategist at Evolution Securities in London, said the pre-market report on the housing market will be the prime influence on stock activity at the opening bell.
"Housing starts are obviously going to be important," he said prior to the report's release, when forecasts from Briefing.com consensus pointed to housing growth.
Economy: The U.S. Census Bureau and the Department of Housing and Urban Development reported that housing starts fell more than 10% to an annual rate of 529,000 in October, the lowest level in six months. An annual rate of 600,000 housing starts was expected, according to a forecast from Briefing.com consensus. The revised rate for September was 592,000.
The government reported that the annual rate of housing permits fell 4% to 552,000 in October, from the revised September rate of 575,000. This was lower than the 580,000 permits expected for October, according to Briefing.com consensus. .
The government also reported its Consumer Price Index, a key measure of inflation, rose 0.3%.
The CPI was expected to rise 0.2% in October, according to a consensus of economists surveyed by Briefing.com.
The core CPI, which excludes volatile food and energy prices, rose 0.2% in October. That was slightly more than the 0.1% increase expected for October, according to Briefing.com consensus.
Companies: Goldman Sachs (GS, Fortune 500) said Tuesday that it is launching a $500 million initiative aimed at propping up small businesses.
World markets: Japan's Nikkei index finished the session 0.6% lower. Major indexes in Europe were higher in midday trading.
Money, oil and gold: The dollar, which has suffered from recent weakness, was down versus all major currencies except the British pound.
The price of oil rose 44 cents to $79.58 per barrel.
For gold, it's been another day, another record. In electronic trading, the price of gold rose $6.40 to $1,145.80 per ounce.
The Dow Jones industrial average, S&P 500 and Nasdaq futures were slightly lower just before market open, giving up their modest gains immediately following a housing report that missed expectations.
Futures measure current index values against the perceived future performance, offering guidance on stock performance, though they're not always an accurate barometer.
U.S. stocks closed at 13-month highs for the second day in a row Tuesday, as strength in commodity-linked shares offset weakness in the retail sector.
Philip Isherwood, equities strategist at Evolution Securities in London, said the pre-market report on the housing market will be the prime influence on stock activity at the opening bell.
"Housing starts are obviously going to be important," he said prior to the report's release, when forecasts from Briefing.com consensus pointed to housing growth.
Economy: The U.S. Census Bureau and the Department of Housing and Urban Development reported that housing starts fell more than 10% to an annual rate of 529,000 in October, the lowest level in six months. An annual rate of 600,000 housing starts was expected, according to a forecast from Briefing.com consensus. The revised rate for September was 592,000.
The government reported that the annual rate of housing permits fell 4% to 552,000 in October, from the revised September rate of 575,000. This was lower than the 580,000 permits expected for October, according to Briefing.com consensus. .
The government also reported its Consumer Price Index, a key measure of inflation, rose 0.3%.
The CPI was expected to rise 0.2% in October, according to a consensus of economists surveyed by Briefing.com.
The core CPI, which excludes volatile food and energy prices, rose 0.2% in October. That was slightly more than the 0.1% increase expected for October, according to Briefing.com consensus.
Companies: Goldman Sachs (GS, Fortune 500) said Tuesday that it is launching a $500 million initiative aimed at propping up small businesses.
World markets: Japan's Nikkei index finished the session 0.6% lower. Major indexes in Europe were higher in midday trading.
Money, oil and gold: The dollar, which has suffered from recent weakness, was down versus all major currencies except the British pound.
The price of oil rose 44 cents to $79.58 per barrel.
For gold, it's been another day, another record. In electronic trading, the price of gold rose $6.40 to $1,145.80 per ounce.
Rising fuel prices hit consumers
November 18, 2009: 8:50 AM ET
NEW YORK (CNNMoney.com) -- Consumer prices in October were essentially unchanged from a year ago, the government reported Wednesday, as the rising cost of oil and gas offset price declines elsewhere.
The Consumer Price Index, the government's key inflation reading, is now down only 0.2% during the past 12 months compared to the same period a year ago. This is the smallest 12-month rate of decline since February.
The so-called core CPI, which is more closely watched by economists because it strips out volatile food and energy prices, is up 1.7% over the past year.
For the month, overall prices rose 0.3%. Economists surveyed by Briefing.com had forecast a 0.2% rise. A 6.3% rise in fuel prices helped feed the overall increase.
The core CPI rose just 0.2%, but that was higher than the forecast of a 0.1% increase.
NEW YORK (CNNMoney.com) -- Consumer prices in October were essentially unchanged from a year ago, the government reported Wednesday, as the rising cost of oil and gas offset price declines elsewhere.
The Consumer Price Index, the government's key inflation reading, is now down only 0.2% during the past 12 months compared to the same period a year ago. This is the smallest 12-month rate of decline since February.
The so-called core CPI, which is more closely watched by economists because it strips out volatile food and energy prices, is up 1.7% over the past year.
For the month, overall prices rose 0.3%. Economists surveyed by Briefing.com had forecast a 0.2% rise. A 6.3% rise in fuel prices helped feed the overall increase.
The core CPI rose just 0.2%, but that was higher than the forecast of a 0.1% increase.
Goldman, Buffett launch $500 million small biz initiative
Last Updated: November 17, 2009: 7:11 PM ET
NEW YORK (CNNMoney.com) -- Goldman Sachs earned an eye-popping $3.2 billion last quarter. Now it's decided to share some of that with the little guys.
The bank said Tuesday that it is launching a $500 million initiative called "10,000 Small Businesses," aimed at unlocking the job creation and economic growth potential of America's small companies. The project's advisory council features an array of business luminaries, including Warren Buffett, Goldman Sachs' largest shareholder. Goldman CEO Lloyd Blankfein and Harvard professor Michael Porter will join Buffett in co-chairing the group.
"Our recovery is dependent on hard-working small business owners across America who will create the jobs that America needs," Buffett said in a prepared statement. "I'm proud to be a part of this innovative program which provides greater access to know-how and capital -- two ingredients critical to success."
Goldman Sachs (GS, Fortune 500) said it will contribute $200 million for scholarships to community colleges and universities around the country. The money is intended to fund training and educational opportunities for underserved business owners.
The bank is also setting aside $300 million to support Community Development Financial Institutions (CDFIs). Certified by the Treasury Department, CDFIs include banks, credit unions and investment funds that target low-income and otherwise disadvantaged populations.
Goldman is seeking a return on some of its community development support: The bank said its CDFI investment will be a combination of loans and philanthropic donations.
Goldman Sachs representatives were not immediately available for further comment on the specifics of the new initiative.
The "10,000 Small Businesses" project comes at a time when many banks -- including Goldman -- have pared back their small business lending. Over the last six months, Goldman has cut the balance of its outstanding loans to small businesses by $191 million, according to a Treasury report released this week. Goldman's small business loan balance currently stands at $3.8 billion.
Obama administration officials, including Treasury Secretary Tim Geithner, will gather on Wednesday in Washington to address the grim state of small business lending.
Last fall's financial meltdown had a cataclysmic -- and lingering -- effect on small business financing. The nation's biggest banks have collectively shaved $10.5 billion from their small business lending balances over the past six months, and small business owners are struggling to get the credit lines they need to run their companies.
Goldman Sachs' CEO on Tuesday apologized for his bank's part in contributing to financial meltdown.
"We participated in things that were clearly wrong and have reason to regret," Blankfein said at a corporate conference in New York. "We apologize."
NEW YORK (CNNMoney.com) -- Goldman Sachs earned an eye-popping $3.2 billion last quarter. Now it's decided to share some of that with the little guys.
The bank said Tuesday that it is launching a $500 million initiative called "10,000 Small Businesses," aimed at unlocking the job creation and economic growth potential of America's small companies. The project's advisory council features an array of business luminaries, including Warren Buffett, Goldman Sachs' largest shareholder. Goldman CEO Lloyd Blankfein and Harvard professor Michael Porter will join Buffett in co-chairing the group.
"Our recovery is dependent on hard-working small business owners across America who will create the jobs that America needs," Buffett said in a prepared statement. "I'm proud to be a part of this innovative program which provides greater access to know-how and capital -- two ingredients critical to success."
Goldman Sachs (GS, Fortune 500) said it will contribute $200 million for scholarships to community colleges and universities around the country. The money is intended to fund training and educational opportunities for underserved business owners.
The bank is also setting aside $300 million to support Community Development Financial Institutions (CDFIs). Certified by the Treasury Department, CDFIs include banks, credit unions and investment funds that target low-income and otherwise disadvantaged populations.
Goldman is seeking a return on some of its community development support: The bank said its CDFI investment will be a combination of loans and philanthropic donations.
Goldman Sachs representatives were not immediately available for further comment on the specifics of the new initiative.
The "10,000 Small Businesses" project comes at a time when many banks -- including Goldman -- have pared back their small business lending. Over the last six months, Goldman has cut the balance of its outstanding loans to small businesses by $191 million, according to a Treasury report released this week. Goldman's small business loan balance currently stands at $3.8 billion.
Obama administration officials, including Treasury Secretary Tim Geithner, will gather on Wednesday in Washington to address the grim state of small business lending.
Last fall's financial meltdown had a cataclysmic -- and lingering -- effect on small business financing. The nation's biggest banks have collectively shaved $10.5 billion from their small business lending balances over the past six months, and small business owners are struggling to get the credit lines they need to run their companies.
Goldman Sachs' CEO on Tuesday apologized for his bank's part in contributing to financial meltdown.
"We participated in things that were clearly wrong and have reason to regret," Blankfein said at a corporate conference in New York. "We apologize."
Friday, November 13, 2009
No Bank Should Be Considered Too Big to Fail: Dimon
No bank should be too big to fail, according to JPMorgan Chase CEO Jamie Dimon, who includes his own institution on the list.
CNBC.com
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Dimon, in a Washington Post opinion piece, said the government shouldn't provide artificial life support to banks that don't perform.
"The term 'too big to fail' must be excised from our vocabulary,'" Dimon wrote in Friday's Post.
Yet he said it shouldn't be the size of the institution that drives the new regulatory policies being considered in Congress but rather their ability to manage risk and provide the best services for customers.
The government should be able to lead an orderly failure of banks but shouldn't impose arbitrary size limits on the institutions, he added.
"Artificially limiting the size of an institution, regardless of the business implications, does not make sense," Dimon wrote. "The goal should be a regulatory system that allows financial institutions to meet the needs of individual and institutional customers while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk."
Limiting the size of banks such as JPMorgan [JPM 42.87 -0.43 (-0.99%) ], Dimon wrote, would also limit corporations that expand globally and need large financial institutions to help underwrite their endeavors.
As such, he cautioned Congress against handcuffing well-run businesses and advised it to focus instead on dealing with institutions that aren't managing risk well, regardless of their size.
"It is clear that we must modernize our financial regulator system," Dimon wrote. "The stakes are simply too high and the consequences too far-reaching to do this hastily."
US Consumer's Mood Worsens On Worries About Jobs, Money
Published: Friday, 13 Nov 2009 | 10:20 AM ET
By: Reuters
US consumer sentiment fell in early November to the weakest in three months amid grim expectations for job and income prospects, a survey showed on Friday.
Consumer sentiment fell further in early November to the lowest level in three months.
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The Reuters/University of Michigan Surveys of Consumers said its preliminary index of sentiment for November fell to 66.0, the lowest since August, from 70.6 in October.
This was well below economists' median expectation of a reading of 71.0, according to a Reuters poll.
"These numbers have been a bit hit-and-miss over the last couple of months," said Shawn Osborne, senior currency strategist, TD Securities, Toronto. "We've had a couple of down months now, but that's not too surprising given the headlines on employment and the gloom surrounding them."
The index of consumer expectations fell to 63.7 in early November from 68.6 in October.
"Confidence tumbled in early November due to the grim financial realities faced by consumers as well as weaker economic prospects for the year ahead—importantly, the decline in confidence was already in place before the announced increase in the unemployment rate to 10.2 percent on Nov. 6," the Reuters/University of Michigan Surveys of Consumers statement said.
Within the survey, the 12-month economic outlook index fell to 67, the lowest since April, from 81 in October.
The 1-year inflation expectation eased to 2.8 percent from 2.9.
"This decreases the need for raising interest rates fairly quickly,," said Doug Roberts, Chief Investment Strategist, Channel Capital Research, Shrewsbury, New Jersey. "It kind of helps the Federal Reserve in their efforts. People are saying we can have jobless recovery. It's going to still be a problem unless people start getting jobs."
Robin Hood Says ‘Hell Yeah’ to Recovery Led by Goldman Bonuses
Nov. 13 (Bloomberg) -- David Saltzman, executive director of the Robin Hood Foundation, may be one of the few people who refuses to demonize a Wall Street recovering from record losses with earnings that may include record bonuses.
“Let me be emphatic about that one: ‘Hell yeah,’” Saltzman said during an interview at Bloomberg News headquarters. “It’s clear that New York City is better off in all sorts of ways if there’s a healthy financial community.”
Robin Hood gets more than half of the $150 million in donations it raises each year from investment banks, brokerage firms and hedge funds. The return of record Wall Street compensation will help the charity continue to fund the more than 200 poverty-fighting programs it supports.
Goldman Sachs Group Inc., the most profitable securities firm, Morgan Stanley, the second-biggest U.S. securities firm, and JPMorgan Chase & Co., the second-biggest U.S. bank, will hand out $29.7 billion in bonuses, up 60 percent from the previous high in 2007.
The U.S. economy expanded last quarter for the first time in a year, growing at a 3.5 percent pace. The Standard & Poor’s 500 Index, a benchmark for the largest U.S. stocks, fell 38 percent last year, the biggest drop since 1937. The index has gained 21 percent this year.
“Our hope is that people think carefully about how to spend their bonuses in this time of great need, and that people will remember to help their neighbors,” Saltzman, 47, said.
Robin Hood saw individual donations drop 3 percent last year, as charitable giving in general declined after the bankruptcy of Lehman Brothers Holdings Inc. in September 2008, according to Mark S. Bezos, senior vice president for development and communications. The foundation raised a record $72.7 million in one night at its 2009 spring gala, yet many contributors hold back their donations until late in the year.
‘How It Will End’
“Our fundraising for 2009 looks okay, but we can’t predict how it will end up this year,” Saltzman said. “It could be that people are wildly generous or it could be that people say I haven’t hit my high watermark. I really hope people respond.”
Saltzman said Goldman Sachs is the biggest contributor among financial firms to Robin Hood. He didn’t say how much the firm or its employees give annually. Goldman Chairman and Chief Executive Officer Lloyd Blankfein has been a board member and has given grants ranging from $5,000 to $500,000 through his family foundation during the past five years, according to the charity’s tax filing.
“Lloyd is a guy who gets it,” Saltzman said. “Goldman as institution and Goldman as the sum of its individuals have been remarkably generous, and it’s from the top down.”
Crash of 1987
Robin Hood was dreamed up 21 years ago by hedge-fund manager Paul Tudor Jones II, chairman and chief executive officer of Tudor Investment Corp. After the stock-market crash of 1987, Jones thought that the U.S. would experience the worst economic decline since the Great Depression, and the poor would need help. He gathered a few young finance executives at his Manhattan bachelor pad to launch the foundation, Saltzman said.
One was Glenn Dubin, who later started Highbridge Capital Management LLC in 1992. Dubin tapped Saltzman to become executive director in 1989.
Saltzman, a native New Yorker, had a master’s degree in public policy from the city’s Columbia University and several years’ experience working for New York’s Human Resources Administration, Department of Health and Board of Education.
Since its founding, Robin Hood has raised more than $1 billion. The nonprofit operates without an endowment. Its board of directors covers administrative and fundraising costs so that all donations are funneled in full to the needy. The directors range from Tom Brokaw of NBC News and actress Gwyneth Paltrow to Steven A. Cohen, chairman and CEO of S.A.C. Capital Advisors LLC and Marian Wright Edelman of the Children’s Defense Fund.
Teen Pregnancy
The foundation is the top nongovernment source of funding for charter schools in New York City. Other programs it supports include: Single Stop USA, which helps poor households secure government benefits; Teacher U, a graduate-level teacher training program; and the Carrera model, which seeks to prevent teen pregnancy.
Michael Weinstein, 61, an economist who studied at the Massachusetts Institute of Technology in Cambridge, Massachusetts and serves as the foundation’s chief program officer, monitors Robin Hood’s aid targets to ensure that the poverty programs it funds get concrete results.
“Robin Hood is a pretty rigorous foundation because they go through a pretty extensive process to determine the impact of the dollars they spend,” said Colvin Grannum, president of Bedford Stuyvesant Restoration Corp. in Brooklyn, which aids the working poor with the charity’s grants. “You have to be committed to working toward specific goals, you have to be responsive to them, and we have to demonstrate what we’ve done.”
Soup Kitchen
Saltzman said he lures donations from Wall Street by taking executives to see a charter school under construction or to a soup kitchen Robin Hood funds. To get younger hedge-fund and Wall Street executives to contribute to Robin Hood, the organization held a fundraiser last night at M2 Ultra Lounge nightclub in Manhattan. Called “Food for Good,” it’s a venture with online grocer FreshDirect based in Long Island City, New York. Each $50 ticket will fund a turkey dinner for a family of eight during the Thanksgiving holiday.
“We want to attract people of all ages to Robin Hood, and what’s great about this was that it was generated by a bunch of people outside of Robin Hood,” Saltzman said.
Saltzman said the organization has begun planning next year’s spring gala. He declined to predict whether it will exceed last year’s ticket sales with big bonuses coming back to Wall Street firms.
“I’m always scared to death before we have an event,” Saltzman said about its spring gala that year that raised about $72 million. “I was scared to death in 2007, I will be scared to death in 2010 and be scared to death for any event we’re a part of.”
Bill Gross Says Value Diminishing in Credit Markets
Nov. 13 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said value is diminishing in credit markets and yield spreads may widen.
Mortgage and high-yield corporate debt is “overvalued,” making Treasuries and investment-grade company debt attractive, Gross, co-founder and chief investment officer of Newport Beach, California-based Pimco said in a Bloomberg Radio interview. Emerging-market debt also offers value to “some extent,” he said.
The sustainability of the U.S. economic recovery by the private sector after government stimulus programs remains in question, Gross said. Below-average growth may prompt yield spreads to increase on high-yield debt and the Federal Reserve’s plan to complete its mortgage purchase program will hurt returns on those securities, he said.
The $192.6 billion Total Return Fund managed by Gross returned 17 percent in the past year, beating 57 percent of its peers, according to data compiled by Bloomberg. The one-month return is 0.94 percent, outpacing 59 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE
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